I was recently looking through the list of investing blogs over at pfblogs.org and I clicked on The Dividend Guy Blog. I was very interested in what I found, and I contacted “the dividend guy” - and asked him if he would write a guest post for No Credit Needed. While I know a good bit about debt reduction and saving money, I am brand-new to investing. I wanted a post that would describe dividends, what they are, and why they matter. I want to thank The Dividend Guy Blog for the following informative guest post and I encourage you to check out his site. As always, information provided here at No Credit Needed is for entertainment purposes only and you should not consider the following to be financial advice, professional or otherwise. Do your own research and consult a financial professional before making any investment choices.

Dividend Investing 101

This article will provide some of the basics of dividend investing.

What is a Dividend and the Dividend Yield?

In the stock market, money can be made in one of three ways:

1. Share price growth – you buy shares in a company at one price and then sell it at a later date for a higher price (hopefully).
2. Interest on bonds or other fixed income assets – you can collect interest from a bond that is essentially you lending money to a bank or company. Interest payments are typically guaranteed payments you can receive on your invested money for a set period of time. At the end of that fixed time, you get all your principle back.
3. Dividends – the topic of today’s discussion!

The technical definition of a dividend is a distribution or payment in the form of cash on some portion of a company’s earnings to the shareholders.

In more simple terms, a dividend is money a company gives you for each share of stock you own in that company. It is cash the company pays you for being a shareholder.

Dividends are often quoted as either the dividend per share (DPS) or dividend yield. The DPS is simply the dollar amount, per share of stock that you hold, that will be paid to you depending on the number of shares you hold. For example, if you own 100 shares of Coca-Cola and the dividend is $1.36 per share, you as an investor can expect to receive dividend payments from the company of $136 per year (note: when you read a stock quote and look at the dividend section, the amount quoted is the yearly amount in dividends the company pays per share, unless otherwise noted).

The more common way dividends are quoted is through the dividend yield of the company. The dividend yield shows how much a company pays out in dividends as a percentage of its share price. The formula to calculate the dividend yield is not complicated. You can do it yourself, however most investor websites where you get your stock quotes will have dividend yield calculated for you:

Dividend Yield = Annual Dividends Per Share (DPS) / Price Per Share

The way I look at dividend yield, is that is is the return on investment an investor will receive from a stock if they buy it at a particular price. Lets look at an example using our Coca-Cola example:

Share Price: $56.40

DPS: $1.36

Dividend Yield: 2.4% ($56.40 / $1.36)

If an investor bought Coca-Cola at this price and this DPS, then every year they hold the stock they will see a return on their investment of 2.4% from the dividends alone.

Compounding: Putting Your Dividends to Work

Now that we have a good understanding of what dividends are and how to calculate the dividend yield, we need to talk about what an investor can do with the dividend payments they receive. There are two choices:

1. Take the dividends out of your brokerage account and spend them on what ever you want
2. Use the dividends to buy more shares of a company

The first choice is not ideal if you are trying to build up your investment portfolio. It may be for you if you are living off your dividend income, but for the purposes of this article we will assume that you are at the asset accumulation phase in your investing career and trying to grow your portfolio.

The second choice is called compounding – income from dividends is reinvested into more assets that provide more income. Each time an investor receives a dividend payment from a company, that income is reinvested into more shares of that company or another company. As this continue to happen year after year, you will find that the dividend income you receive from your portfolio will increase allowing you to reinvest it into more and more assets. It is a wonderful circle of cause and effect. To highlight the power of compounding, I will once again go back to our Coca-Cola example. Let us assume that you as an investor bought $10,000 worth of Coca-Cola stock and you reinvested all the dividends you received back into more shares of Coca-Cola. Here is what your investment would look like in 20 years,

This chart does not even take into account the change in share price that Coca-Cola would see over that time period. The key thing to note is that if Coca-Cola’s share price stayed exactly the same as the day you bought the stock and you reinvested the dividends into more Coca-Cola stock, your $10,000 would grow to $16,069 in 20 years based on the dividends alone. We all know that stocks also see their share prices grow so in 20 years, an investor would expect to see the gain from an increased share price as well.

Looking for Dividend Growth

One last thing I would like to cover before we finish here is an important consideration for dividend investors. It is the first thing that I look for when deciding to buy a stock or not. It is called dividend growth – when a company raises the dividend per share paid to investors on an annual basis. This is an important factor because if actually provides more power to the compounding machine we spoke about above. Going back to the compounding example above, if Coca-Cola increases its dividend per share ever year, then ever year you are receiving more dividends. This provides you with more income to buy more shares. It happens over and over again and will further compound your returns in that investment.

Where to Find Potential Dividend Investments that Increase Their Dividends

There are two potential sources of dividend growth stock ideas that an investor can look at to generate ideas for further research. They are called the Dividend Achievers and the Dividend Aristocrats.

Dividend Achievers: Stocks that have increased their dividends for at least 10 years

Dividend Aristocrats: Stocks that have increased their dividends for at least 25 years
These lists are not meant to be buying recommendations. I use this list to look for companies that I want to invest in, and then do further research on them by looking at such things as earnings, revenue, and cash flow. Only then do I buy shares in that company.

About The Dividend Guy

The Dividend Guy runs an investment blog focused on investing in high dividend stocks and dividend growth stocks. His vision for the site is to share his passion for investing in high dividend stocks that consistently grow their dividends to ensure a steady stream of dividend cash flow building up to his retirement.

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I work for a tax-exempt organization so, instead of having a 401k, I have a 403(b). My retirement contributions are sent by my employer to the company that operates the 403(b), but the responsibility for allocating those contributions rests with me. I’m rather new to the “investing game” and I’m taking the time to research the various mutual funds available to me inside my 403(b) plan.

My 403(b) offers two different fund categories.

Category 1: Select Funds: These are basic mutual funds. By selecting among the various “select funds” I can create a completely customized “portfolio”.

According to the Securities and Exchange Commission, “A mutual fund is a company that pools money from many investors and invests the money in stocks, bonds, short-term money-market instruments, or other securities.”

According to Wikipedia, “In finance, a portfolio is a collection of investments held by an institution or a private individual.”

So, when I invest in a select fund (mutual fund) my money is pooled with the money of other investors and used to purchase stocks, bonds, etc. The combination of all of my select funds (mutual funds) equals the total value of my investment portfolio.

Types of Select Funds available in my 403(b):

Money Market
Low-Duration Bond
Medium-Duration Bond
Extended-Duration Bond
Equity Index
Real Estate Securities
Value Equity
Growth Equity
Small Cap Equity
International Equity

Let’s assume that I have $1000 in my 403(b) account. I can choose to allocate that $1000 in any manner that I wish. I can put 50% in the International Equity fund and 50% in the Equity Index Fund, or I could allocate 5% to Small Cap, 10% to Real Estate Securities, and 85% to the Medium-Duration Bond fund. The choice is completely up to me, as long as the allocations for my funds add up to 100%.

I’ve created the following graphic to illustrate how a 403(b) retirement account would work if my entire portfolio was invested in Select Funds (Mutual Funds):

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Category 2: Blended Funds: These funds invest in the various Select Funds. In other words, these are funds-of-funds.

Types of Blended Funds available in my 403(b):

Flexible Income
Growth and Income
Capital Opportunities
Global Equity

These funds provide inherent diversification and are listed by their assumed risk/return ratios. In other words, those looking for a higher return (and who also have a higher tolerance for risk) might choose to invest 100% of their contributions in the Global Equity fund. I can purchase one Blended Fund and still diversify my investments. Going further, I could also purchase multiple Blended Funds, but doing so might defeat the purpose of purchasing a Blended Fund. Blended Funds, by definition, are already diversified and categorized by risk/return assumptions.

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My 403b provider offers Select Funds (which are mutual funds) and Blended Funds (which are funds that invest in the various Select Funds). I am free to decide how to allocate my investments.

1. I can choose to purchase only Select Funds (or just one Select Fund).

2. I can choose to purchase only Blended Funds (or just one Blended Fund).

3. I can choose to purchase Select Funds AND Blended Funds.

Confused? Most people are. I will confess, it takes a lot of effort to understand retirement funding and the various allocation options that are available. There are so many terms to understand, so many different opinions about what to invest in, and so many people trying to make a dollar “giving advice”. It’s amazing that something so important, so vital, is shrouded in difficult to understand terminology. Hopefully, as I move forward, I’ll gather more information and understand more and more about investing.

So, how have I chosen to allocate my money? I went the easy route and put 100% of my money in the Select Fund - Equity Index. This fund is an index fund, it invests in the stocks of the S&P 500, and it has a very low expense ratio. I like to keep things simple - very, very simple!

(One note: My 403b provider describes their funds-of-funds as Blended Funds. Certain mutual fund providers also offer regular mutual funds labeled “Blended Fund”. If you run into this term, be sure that you understand the difference.)

Please note: I am not a financial professional and I do not give investing advice. Take the time to educate yourself about investing.

Resource: For additional information about the 403(b), checkout 403b wise.

Resources: If you are looking for a great book about investing, may I suggest the following two? I really like them both.

The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns (Little Book Big Profits)

The Bogleheads’ Guide to Investing

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I’ve been thinking about why people fail to save money and fund retirement accounts, and I think that I’ve come up with something.  “Saving money” is complicated.  Think about it.  How many different types of “savings accounts” are there?  Off the top of my head, I can list several: Online Savings Accounts, Money Market Accounts, Local Bank Savings Account.  Now, how many different types of “retirement accounts” are there? Roth IRAs, Traditional IRAs, 401Ks, Sep IRAs, 403bs, Roth 401ks, etc.  And “education savings accounts”?  ESAs, 529s, UTMAs, UGMAs.  These are just a few of the “account types” available for “saving money”.   It can get confusing.

After deciding the “account type”, a saver then must then learn about investing.  Should I buy Bonds? CDs? Stocks? ETFs? or Mutual Funds?  All of the above?  None of the above?  And once I decide WHAT to buy, I have to figure out Market Orders, Limit Orders, GTC, AON, Transaction Fees… The list goes on and on and on and on.  Figuring out what to buy, when to buy, and from whom to buy it can be overwhelming.

I’ve come to the conclusion that MANY people stay in debt because figuring out “how to save” appears to be too complicated.  Think about it.  Borrowing money is “simple”.  I know how much interest I have to pay, I know how long I have to make payments, and I can easily “do the math”.  Saving money is “complicated”.  Even if I manage to save some money in my checking account, eventually, I have to figure out “what to do with it”.  Should I put it into an emergency fund?  Should I fund my child’s ESA?  How about my wife’s Roth IRA?  Then, once I decide “where” the money should go, I have to figure out “what” I should do with the money.  What will my interest rate be?  What are the risks?  What are the rewards?  What happens when I work really, really hard to “save” $4000 in my Roth IRA and the stock market takes a dive and my $4000 turns into $2000?

I’ve yet to mention insurance, tax rates, inflation, or income limits.  So, what’s the point of this post?  Have I suddenly become “anti-savings”?  Am I suggesting that we all simply continue to borrow money because that’s “simple”?  No way.  What I’m suggesting is that, if you plan to be wealthy, you have to PLAN to be wealthy.  You need to learn as much as you can about as much as you can!  And, don’t wait until you’re “debt free” to learn about investing and investing accounts! Personally, I’ve mapped out my strategy for the next year, the next five years, the next 10 years, and the next 25 years.  I’ve taken the TIME to learn (a little) about investing and long-term money management.  Notice how this works.  Being broke and making payments is “simple”.  Building wealth and saving money can be “complicated”.

Over the next few days, I’ll write about my plans for the future, but I wanted to set the table and fully acknowledge that understanding the world of personal finance can be difficult,.  I’ve been writing about my personal finances for more than two years and I still have more “questions” than I do “answers”.  But, I’ll not let a “confusing system” keep me from building a future for my family.  In other words, my second job will be learning about managing the money I make at my first job.

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I thought I’d take a peak at my Roth IRA and see how it was performing.  My wife and I have four primary retirement funds.  I have a 403b through work, she has a pension plan through her work, and we both have Roth IRAs.  I’d breakdown my investment philosophy thusly:

Pension Plan:  My wife’s plan will provide guaranteed retirement income, so, no real worries here unless she were to change jobs or get sick.

403b: I’m pretty aggressive with my 403b investments.  I invest in a small cap mutual fund, an international growth stock fund, and a REIT.

Roth #1 (My Wife’s):  In this account, we stick to “safe” index-based ETFs.

Roth #2 (My Roth):  In this account, I invest in single stocks, trying to buy stocks that have a dividend and / or appear to be “good values”.

(I’m not an investment professional, and I would NEVER give investment advice.  I’ve read several books on investing, and every time I read a book, I think, “NOW I understand!”.  Then, I read another book and I completely change my mind!  The above breakdown represents what I’m doing TODAY.  By tomorrow, I may change my mind and become more conservative, or, conversely,  I might change my mind and become much more aggressive.  Honestly, my main goal at this point is to save as much as I can, upfront, and learn as I go along.

Here’s the current chart for my Roth IRA, Roth #2:

As you can see, I purchased 60 shares of PEP (Pepsico) in April.  Since then, the price of the shares has gone up, which is always a bonus.  I’ll update this account, and the others, from time to time.

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I own one individual stock. I purchased 450 shares of CNXT a few months ago, and it is just sitting in my Tradeking account. I use Tradeking because they have no inactivity fees, and trades are just $4.95. This account is “separate” from the rest of my money, and I do not include it when I am figuring net worth or cash balances. It’s my 1000 dollars in “play” money. CNXT hovers around 2 bucks… I hope that one day it makes a big jump and I can cash in and buy some fun stuff. But, I am not depending on my individual stock picks for my future or my retirement. I’m sticking with my mutual funds for those purposes. It’s fun to buy and sell a stock once in a while, but it’s not my “game”.

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