FP Article 10
Why Bother With
by Rajen Devadason
Do you know the only thing that gives me
pleasure? It's to see my dividends coming in.
are many ways to invest in stocks.
One of the most satisfying is to
gradually build up a portfolio of
high dividend yielding stocks.
There really isn't
anything like the feeling of calm
satisfaction that accompanies
receiving yet another dividend
cheque in the mail. To my mind, it
is the ultimate form of passive
In case you aren't
100% certain what dividends are,
I'll begin... well, I'll begin at
In the simplest of terms, a dividend is nothing
more - nor less! - than a payment in cash (or
less commonly in the form of stock), made from
the earnings of a company to reward its
This is an article on the attraction
of dividend-based investing. I hope you enjoy
reading it. But if it isn't what
you're looking for, you're welcome
to look for something that does meet
your needs. Thank you for allowing
me to serve you.
capitalist society, the easiest way for anyone
to partake of the rich fruits of capitalism is
to become a partial owner of a solid business
that generates profits and rewards its owners on
a regular basis.
Each time we invest in a stock,
we hope for one of two things to happen:
1. The price will go up -
this is known as capital appreciation; and
2. The investment will
generate a healthy stream of cash - this is
obviously the regular dividend stream I believe
each of us should aim to put in place for
Let's say there's a listed
company called Cash Bulge Ltd, which made
a share in the last financial year. For
the sake of this simple example, let's say it
made $40 million in net profit during that
period and that it has a share base of 100
You see where the '40
cents a share' I mentioned came from.
Its board of directors may decide
that of that $40 million, it would like to
reward its shareholders a total of $10 million.
Shareholders will thus receive a
dividend cheque that is directly linked to the
number of shares they own. If a person has only
one share, he would receive $0.10 [=($10
million/$100 million) x 1]. Another investor
with one million shares would receive 1 million
x $0.10 = $100,000.
The company gives out $10 million
in total to all its shareholders, and retains
$30 million for its ongoing business expansion
For most long-term investors, the
cumulative effect of receiving dividends once a
year or once in six months or even more often is
a fantastic benefit of holding common stocks.
But as much as these investors
like receiving their dividend cheques, they
realise the company must continue to keep enough
of its profits to sustain growth. That's why
investors are generally leery of companies that
pay out too much of their net profit.
How much is 'too much'? That
question is best answered by working out what's
known as the dividend cover. This is investment
lingo for a simple idea:
number of times a company's earnings for the
year can cover its total payment for that
year. In our case, the company has a
gross dividend cover of $0.40 divided by $0.10 =
The inverse of the calculated
dividend cover is called the payout ratio.
In this case, Cash Bulge Ltd has a gross payout
ratio of 25%. The reason I've added the word
'gross' in this paragraph and the preceding one
is to indicate the quantities being referred to
('gross dividend cover' and 'gross payout
ratio') are shown before the company strips out
the corporate tax charge that usually needs to
be paid to the government on behalf of each
That's probably more detail that
you want to have right now. What you should be
very conscious of, however, is the DPS or
dividend per share quantity.
Working out the DPS is easy.
Simply add up all dividends paid out over a
one-year period and divide that amount by the
number of shares the company has issued during
the financial year.
For companies that don't change
the number of shares through bonus issues,
rights issues and subsequent public offerings or
via a share buyback scheme, there is no further
complication. For those companies that do carry
out corporate finance exercises that change the
number of shares during various points of the
year, then the weighted number of common shares
for the year must be used when working out the
REINVESTMENT PLAN (DRIP)
Do not confuse a
DPS and a DRIP. A DRIP is not something that's
available in all countries. In nations like the
US, where DRIPs are available, investors gain
access to easy forms of reinvestment.
instances, those companies with a DRIP programme
NOT cash dividends but rather stock
dividends! Each time a stock dividend is
declared, therefore, investors gain more shares!
I hope you are now
sufficiently inspired to begin the
process of buying long-term stock holdings with
a view to building up a robustly gushing stream
of dividend income.
If so, you must
keep track of the dividend yield of each of your
personal stock holdings.
You calculate this
quantity by first taking the total dividend paid
out in the last year and dividing it by the
stock's current price.
It's likely that
within your local stock market are many
dividend-paying stocks that warrant closer
inspection. I suggest you print out this article
(or at least bookmark it) so that you'll have it
handy to reread the next time you choose to
research possible additions to the
dividend-paying portion of your overall
© Rajen Devadason