Computer Exercise #5 Dividends 03-23-11-1

Computer Exercise #5 Dividends 03-23-11-1 - EE 0822...

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EE 0822 INVE$TING FOR THE FUTURE Mr. Lengkeek INVESTING TOOLS 5 DIVIDENDS AND THEN SOME! This computer exercises has been designed for two purposes. First, to help you start thinking about dividend stocks as possible purchases as possible investments. Secondly, to introduce you to some new dividend stocks that might be good dividend stock candidates. What you are going to do for this computer exercise is to calculate what is the total return (annual capital appreciation and annual dividend growth) of two stocks. We know that there are companies which pay their shareholders a certain amount of money every 3 months (quarter). This usually happens because 1.) the company wants to thank the shareholders for investing in the company, and therefore, the company (Board of Directors, actually) wants to share some of the profits with the shareholders, and 2.) the company is making enough money that they have cash left over at the end of the quarter. The dividend is a good show of the strength of a company. One of the most important things about dividends is that they usually grow. If a company is making money, as time goes by, they will more than likely be making more money and therefore the size of the dividend will grow. Some can grow at a rate of more than 20% annually. However, dividends can also decrease over time, but even in hard economic times companies still pay out dividends. Dividends are a way of the company showing its financial strength. We can see that if dividends grow then investing in a company whose dividend is growing is very possibly better than investing in bonds, even if initially the yield on the stock (the dividend divided by the stock price ) is lower than the bond yield. The stock dividend can and most probably will increase its yield, whereas the bond yield stays the same as it was when it was first introduced, and never changes over the lifetime of the bond. Besides the dividend increasing with time, the price of the stock also increases with time. Here we are talking about a long time-frame, perhaps 10 or more years. In the short time-frame all stocks will vary between two extremes, one of increasing in price and the other decreasing in price. However, over the long term stocks will increase in price. This does not mean that some stocks won’t just decrease and then keep decreasing in value. There will always be companies which fail and if that happens, the 1
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EE 0822 INVE$TING FOR THE FUTURE Mr. Lengkeek INVESTING TOOLS stock can go to zero (Bankruptcy!). However, for the large majority of stocks this does not happen. We all know that the stock market itself increases over time. Just look at the S&P 500 - it was at 18 in 1950 and now is at 1300 ( 7100%!! ), or the Dow, which was 270 in 1950 and more than 60 years later is now 12,000 ( 4300%!! ). Yes, over the short run the market and those indexes can go down but over the long run they have all gone up. 5.1
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Computer Exercise #5 Dividends 03-23-11-1 - EE 0822...

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