What is a dividend in stock?

What is a dividend in stock?

What is a dividend in stock? It is very important question to ask and truly understand what it means to you and your money. If this base concept is cleared you will be more confident in making you decisions. Imagine how your confident you would be if understood impact of purchase price and dividend received. I try to explain the simple basics of dividend in stock.

Dividend is cash payment received by you because you own the stock. You need to pay special attention to when exactly will be dividend paid(Money deposited in your account).

To simply understand the concept what is a dividend in stock, first understand that you need to own the company stock. Let’s take example of one of my top dividend stock as of Mar 10 2017, CLM(Cornerstone Strategic Value Fund, Inc.).

Let’s say you bought CLM for price of 16 dollar each. You invested(purchased) 100 stocks. You have invested 16 * 100 Shares = 1600 dollars. This stock pays you 2.79 dollars ( 2 dollars and 79 cents) every year. What this means is for each share the company will deposit(pay in your account) 2 dollars and 79 cents. You will receive 2.79 * 100 = 279 dollars each year. This amount deposited in your account is called dividend in stock. CLM is exceptionally high yield dividend in stock. You do not receive these kind of returns in any single stocks.

Let’s find out what is your rate of return on this investment. You invested 1600 dollars, you got 279 dollars for investing into this stock. This stock is yielding 279/1600 = 17%.

As you can observe your money is returning 17% per annum. This is the yield of a stock. So what is the trap here? If a stock is returning 17% per annum then why not invest all your money into this one and enjoy the returns. At face value you would this this is correct but stock prices are not stable. CLM will not be 16 (your purchase price). It could go down very low or could go up very high during a period of 1 year.

What is a dividend in stock?
What is a dividend in stock?

 

Above chart of CLM shows how the dividend yield(return) changed each month from Feb 2016 till Sep 2016.

This is how you calculate the dividend in stock as price changes

Dividend per year Purchase Price Dividend Yield

Dividend/Price

2.79 dollars 10 dollars 28%
2.79 dollars 12 dollars 23%
2.79 dollars 14 dollars 20%
2.79 dollars 16 dollars 17%
2.79 dollars 20 dollars 14%

If you keep the dividend constant at 2.79 dollars you will see that expensive you purchase a share, less is your rate of return.

Following video gives you some more clarification about what are dividends