Did you know that you can get paid, just for owning stock? I’m talking cold, hard cash. Multiple times per year, even!
Good, now that I’ve got your attention about it, let me explain. A previous post said one stock, or share, is a very small portion of a company. Not physically a part of the company itself, but a financial interest in a company.
Why People Own Individual Stocks
Let’s say you’re in possession of some Starbucks stock, for example. Owning that stock entitles you to receive:
- Return on your investment. The usual reason people own stock, and the most widely understood is that you anticipate the stock price will increase. Then, you could sell it for more than you paid. Which is not guaranteed, but that is also widely understood.
(Companies focused on aggressively growing their stock price can be referred to as: Growth stocks)
- A portion of Starbucks’ profits. A company with large profits may pass those along to shareholders by way of real cash. That cash is called a dividend. Some companies are focused on having large profits so they pay big dividends to shareholders. (You may hear these referred to as: Income stocks, Dividend Paying Stocks, or High Yield Stocks). Now, I’m not saying Starbucks is an ‘Income stock.’ Don’t go around telling your friends this. It’s just the example company here. And not all stocks pay dividends, but some do.
This may help you understand dividends. Let’s look at Starbucks’ actual dividends for 2017.
Take a look at the chart (a portion of their Morningstar report) showing historical payouts to shareholders. This is a per share report. Meaning, you would’ve received the cash amount listed for each share owned.
Follow along the highlighted “Dividend Amount” line near the top. You can see the annual dividend paid from 2013 to 2017.
Looking down the page from the 12/2017 column, you see the $1.05 broken into 4 payments. If you owned Starbucks, you would have received $0.25 during the first, second & third quarter. The fourth quarter you would’ve received $0.30. Bringing the total paid – per share – to $1.05.
That’s all that a dividend is. Pay for play. You can get money for investing in a company.
Income vs Growth Focused Stocks
Income Stocks is another term used for companies whose stocks pay large dividends. That was mentioned earlier in this post.
Owning lots of stock that pays dividends makes a big impact for people needing extra income.
I know, I know. We could all use that. But in real life, who are these people? Our parents. Retirees. People with no job, and a fixed income like social security. Owning stocks that generate cash are great for people who need extra income in their life.
Have you heard the joke around the office Powerball pool? Someone always says they would invest their winnings and live off the profits? Ding ding — income from the stocks will be the profits. Because you can’t just live off of increasing stock prices.
Flipside of these income focused stocks are growth focused stocks. Where a dividend focused company may be mature (think Coca Cola), and needs high dividend payouts to attract stock purchasers; a growth focused company may be more nimble and – perhaps – risky.
They pour profits into making the company better & better. And not pay that cash into your pocket. Instead of getting a few dollars for owning the stock, you will hopefully be able to sell the stock for much more than you paid (along the lines of Amazon). The focus on increasing the stock price as a way of attracting stock purchasers makes these growth stocks.
Income stocks may be more appropriate for a later stage in your life because the companies are generally established and therefore seen as ‘safer.’ Growth stocks may be more appropriate when you are younger and have time for the growth to happen. Because growth can be risky.
Also important, you can be taxed on dividends. Of course! Because the government is always looking to get paid, too. So unless you own dividend paying stocks (don’t you already feel awesome understanding such jargon) in your retirement accounts, 401(k), or IRA – then you will be paying tax on it every year.
So why have I introduced those terms? Because they will come up in conversations with your financial planner or other articles about investing. And I’m all about you looking like a pro. Knowledge is power, and you are powerful! Now you can follow the conversation when you financial advisor is throwing around terms like: income portfolio, growth & income portfolio, or growth portfolio.
As always, if you read this article, or any post from around the web, but have questions and don’t completely understand something… please come back and ask for clarification. E-mail me, comment below, send a DM on Instagram. I’ll respond back or write a post about it. *No stock or security specific questions (like, should I buy Apple?) but general knowledge questions, or “What did they mean when they used *this* term.)