Lets talk about the basics of stock dividends, what they mean, and how we look at dividends as Rule #1 Investors.
What are Dividends?
What are dividends? Dividends are a distribution of a companies earnings, decided by the board of directors, to its shareholders. They may be in the form of cash, stock or property.
Dividends are the money that the company pays out to its shareholders in cash.
For example, Coca Cola probably pays about a 2% dividend. If Coca Cola stock is, say, $40 dollars a share, 2% of 40 dollars is about a buck, .80 cents to a dollar and thats what its dividend is.
A lot of people live on the dividends of a company. In fact, in the great depression, people thought that the only value of stocks at all is the value of the dividend being paid out, because stocks weren’t going up they were going way down.
How Rule #1 Investors Look at Dividends
When we look at dividends as Rule #1 Investors, we look at it very differently than most people do. we see dividends, not as a return on our investment of 2% or 3% a year, we see it as a simple return of our capital. We’re looking to get our money off of the table.
Using Dividends to Lower Risk
We want to lower our risk every year by receiving dividends, so that reduces the amount of what we call basis every single year. As our basis goes down every single year, our risk of owning that business goes down. If the dividend is very high, lets say 6% a year, then in 10 years we might have removed 60% of our risk off of the table and we have a very low chance of losing money on that investment.