You can invest in multiple stocks on BUX, but did you knew buying stocks is not the only way for making money? You can also invest in stocks for their dividend and it can also be very rewarding! So, in this post I’ll explain what dividend and what the dividend yield is.
Dividends are when a company distributes a portion of its profits to its shareholders . These dividends will be shown under your netto tab in your positions on BUX X once you get it. But what is dividend exactly and how is it determined?
Let’s say we own a share in a company, let’s call this company BUX’ Restaurant , and assume it’s a restaurant chain that has thousands of restaurants across the country. BUX’ Restaurant is doing its thing, like selling great tasting ramen to people like you and me and making a profit. And since shareholders are owners, it makes sense that we get a part of this profit. BUX’ Restaurant will distribute a small portion of its profit to shareholders, and this, is what we call a dividend.
So assume that BUX’ Restaurant pays a quarterly dividend of 25 cents. Let’s imagine I have one share of BUX’ Restaurant and with this one share, I will be getting 25 cents from BUX’ Restaurant, every quarter year, which is 3 months. I get this 25 cents, for being a shareholder, which is not a laborious task, you just buy shares, and, well, chill, relax, continue on with your life, you get the point. This one share got me 25 cents, in 3 months. Now say I hold this share for a year, and since this dividend is issued quarterly, that means I get 4 payments of 25 cents, so I’ve just gotten a full euro in dividends.
Realistically, it’s very unusual for someone to invest in a company with only 1 share, so say I have 100 shares of BUX’ Restaurant, that means in a year, I make €100. Say I have a 1000 shares, in a year, that’s a thousand dollars. €1000 for what? €1000 for being a shareholder. So basically, chilling!
Now the longer you chill, I mean, uhh, hold your shares for, the more money you will make. If 100 shares of BUX’ Restaurant give me €100 in dividends every year, and I hold this company for 2 years, that’s €200, if I hold it for 5 years, that’s €500, if I hold it for 10 years, that’s a €1000 and so on and so forth. In the real world, dividend paying companies usually increase their dividends often, so if you hold for a long time, the dividends will usually increase.
You need to know a few things now. Dividends can be paid in cash or in stock, which is when the company will issue extra shares instead of cash. But you can always sell those extra shares for money if you really want the cash that bad. Note that BUX always give dividends in cash-form. Next thing, not all companies pay dividends to their shareholders. These companies may be reinvesting every penny back into the business, or may not even be making a profit.
Companies can pay dividends quarterly, semi-annually, or annually. So that means once every three months, or once every 6 months, or once every year.
So BUX’ Restaurant pays a quarterly dividend of €0.25. Which means in a year, it pays a total dividend of one euro, since 25 cents every 3 months adds up to one euro every year.
We know how much BUX’ Restaurant pays in dividends for every share that we own, but we don’t know how much it costs to buy one share of BUX’ Restaurant. What if I told you that one share of BUX’ Restaurant costs €1000. Yes, €1000 to buy 1 share of BUX’ Restaurant, and it only pays us one euro in dividends every year.
And what if I told you that one share of BUX’ Restaurant costs only €20. €20 for one share, and it pays us one euro in dividends every year. Which one would you rather pick?
I would pick the €20 share that pays me €1, instead of the €1000 dollar share that pays me €1. Why? Because it has a greater yield! Yield is simply the dividends we get, relative to the price of the share. That’s not a dictionary definition, it’s my definition for this case.
So now let’s calculate the yield of these two options, let’s start with the €1000 share.
If one share of BUX’ Restaurant costs €1000 and in one year, it gives us one dollar, the annual dividend is one dollar. So to calculate the yield, we need to take the dividend, and divide it by the price. So the dividend of one dollar, divided by the price of €1000, equals 0.001, which can also be expressed as 0.1%. So the dividend yield in this case is 0.1%.
Now let’s move on to the next case. If one share of BUX’ Restaurant costs €20 and in one year, it gives us one euro, the annual dividend is one euro. Just like before, to calculate the yield, we take the dividend and divide it by the price. So the dividend which is one dollar, divided by the price, which is €20, equals 0.05, which is another way of saying 5%.
So that’s dividend yield, the dividend relative to the price. The €20 share has a yield of 5%, that means I’ll be getting 5% of the money I paid every year. It means 5% of the price, will be paid to me in dividends. With the €1000 share which has a yield of 0.1%, it means I’ll be getting 0.1% of the money I paid, every year. It means 0.1% of the price, will be paid to me in dividends.
So which one would you rather pick? Would you rather have your dividends equal 5% of the price you paid, or would you rather have them equal only 0.1% of the price you paid. I would rather have them equal 5% of the price I paid, because I get more money relative to the price I paid. If we’re only looking at dividends, paying €20 to get an annual dividend of €1, is better than paying €1000 to get that same annual dividend of €1.
Remember, stock prices change every day, so that means, dividend yield will also change every day. If its €20 to buy a share that has an annual dividend of €1, it has a yield of 5%. If tomorrow, the price of that same share goes up to €21, then we divide 1 by 21 to get a yield of 4.76%. So as prices change, so does the yield, as dividends change, so does the yield.