Investing
7.4 Stock Investing
Activity
Name
The Value of Dividends
If you recall from the “Intro to the Stock Market” lesson, there are two ways to make money on stocks -- you can sell them for a
price higher than you bought them (this is what you just explored in the previous activity on rate of return) or you can collect
dividends. A dividend is a dollar amount, paid per share, that the stockholder receives out of the company’s annual profits. For
example, if Penny’s Pickles grants dividends of $4 annually, per share, and you own 100 shares, you would receive $400 from
Penny’s Pickles for the year; dividends are frequently paid quarterly, which means you would receive $100 each time. Not all stocks
grant dividends, but many do, and they are a good way to increase the power of your investments.
1 ) Learning from data - part 1
The excerpts below are taken from 40 Things Every Dividend Investor Should Know About Dividend Investing
http://www.dividend.com/dividend-education/40-things-every-dividend-investor-should-know/, an article from Dividend.com.
Read the text and review the data presented in #1, then answer the questions that follow.
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d
**Note: Here are a few vocabulary terms to help you out:
● Annualized Dividend Yield = The return you receive from a stock’s dividends in one year
● Annualized Share Price Appreciation = The return you receive from a stock’s share price in one year
A. In the time period from 1940-1950, what was the approximate percent of return that can be attributed to
dividends?
B. In that same time period, what was the approximate percent of return that can be attributed to stock price?
C. If you were an investor between 1970-1980, did a greater portion of your annualized returns come from
dividends or stock appreciation?
D. Name 3 time periods when a greater portion of annualized returns came from stock appreciation.
E. Name a time period when there was negative stock appreciation (called depreciation) but positive dividends.
Why do you think that is possible?
2 ) Learning from data - part 2
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Read the text and review the data presented in #1, then answer the questions that follow.
Let’s assume that “Investor A” is the left column in the chart above, while “Investor B” is the right column
A. How much is each investor making, per year, in dividends? *Note: Use the $5 per share and 100 shares, not the
“Dividends Paid” total from the chart.
BONUS question: Why is the Dividends Paid (in the chart) for Investor A different than your answer above?
*Hint: Read the text above the chart carefully for the answer.
B. What action is Investor B taking that Investor A is not?
C. Explain how Investor B ended up with 338.64 in Number Shares, when both investors originally purchased the
same 100 shares of stock.
D. How much more Total Value (based on the chart) does Investor B generate, compared to Investor A, over the
25-year time period?
E. Suppose Investor A took his dividends each year and put them in a savings account with a 0.95% Interest
Rate, compounded 1 time per year. Use this compound interest calculator
http://investor.gov/tools/calculators/compound-interest-calculator to determine how much dividend money
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Investor A would have at the end of 25 Years to Grow.
*Note1: Although dividends are typically paid quarterly, this calculator requires you to make a Monthly
Addition instead, so you can use $83.52, which is $25,056 in Dividends Paid / 25 years / 12 months in a year).
*Note2: Enter that Investor A starts with $1 Current Principal, so that the calculator will work.
F. Which investor would earn more in this case -- Investor A, if he puts his dividends in a savings account, or
Investor B, who reinvests them in the stock?
G. Which investor is taking on more risk with his/her dividends?
3 ) The Value of Dividends
A. Give at least 3 reasons why an investor might want to purchase stock in companies that grant dividends.
B. Think of at least 1 reason an investor might choose a stock that does not grant dividends.
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