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The Basics of Dividends

Phil Town
Phil Town

Let's talk about the basics of stock dividends, what they mean, and how we look at dividends as Rule #1 investors.

What are Dividends?

Dividends are a distribution of a companies earnings to its shareholders, decided by the board of directors. They may be in the form of cash, stock or property.

Dividends are the money that the company pays out to its shareholders in cash.

For example, Coca-Cola pays about a 2% dividend. If Coca-Cola stock is, say, $40 dollars a share, 2% of 40 dollars is about a buck, .80 cents to a dollar and that's what its dividend is.

A lot of people live on the dividends of a company. In fact, in the great depression, people thought that the only value of stocks was the value of the dividend being paid out because stocks weren’t going up they were going way down.

How to Look at Dividends

When we look at dividends as Rule #1 investors, we look at it very differently than most people do.

We see dividends, not as a return on our investment of 2% or 3% a year, we see it as a simple return of our capital.

We’re looking to get our money off of the table.

Using Dividends to Lower Risk in Investing

We want to lower our risk every year by receiving dividends, so that reduces the amount of what we call basis every single year. As our basis goes down every single year, our risk of owning that business goes down. If the dividend is very high, let's say 6% a year, then in 10 years we might have removed 60% of our risk off of the table and we have a very low chance of losing money on that investment.

So dividends to a Rule #1 Investor are a way to reduce basis, get your capital off of the table, and lower your risk.

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