Dividend School is in Session

Lately on TikTok, I’ve been getting a lot of messages on my dividend videos that make me feel like people aren’t quite grasping the staggering long term benefit of dividend investing. Not only that, but the misinformation on dividends, as a finance educator, terrifies me.

So, in addition to my free investing resource guide, I’ve made this one page document. We’re not wasting any time here. This is …

Everything You Need to Know About Dividends

• A dividend is not a return of capital. It is a portion of the company’s profits. 

• One share of KO as of this article being posted is $60.39.

• Coca Cola will give you $1.84 per share that you own. Whether KO stock goes up or down, the $1.84 dollar amount will stay the same unless KO raises or cuts it.

• The 3.05% yield you see is a percentage of KO’s stock price. The yield/percentage will change daily as KO’s stock price goes up or down. If KO stock crashes 20%, the $1.84 dividend will remain the same (unless they cut it). But the yield (the percentage) will go up.

• If KO dropped 20%, the stock would go from $60.39 to $48.32. If they maintained their $1.84 dividend, the yield would go from 3.05% to 3.80%

• High risk dividends include anything over 10%, typically. A high dividend yield can be a sign that the company’s share price has declined rapidly. Inexperienced investors are often attracted to high dividends. That can be a rookie mistake. 

• Most companies pay quarterly, but some (like REITs) pay monthly. 

• Cash will be deposited into your account, unless you enroll in DRIP (Dividend Reinvestment Plan). 

• DRIP will allow you to reinvest your dividends so you can get more shares. 

• DRIP allows investors to benefit off long term compounding. 

• High growth stocks typically do not pay dividends. 

• Large cap established companies often do pay dividends. 

• Dividends are not meant to offset losses.

• Dividends are not “free money.” it takes a lot of shares and a long time to be able to “live off your dividends.” 

• You can see what percentage of the company's earnings are being distributed via dividends by looking at their Payout Ratio. 

• A low payout ratio means the company could increase dividends for years to come. 

• A high payout ratio means the company might not be able to increase dividends, but might mean you’re able to have stable dividend income. 

• KO’s payout ratio is 69%

• There are ordinary dividends and qualified dividends. 

• Ordinary dividends are what most people get. They’re taxed at your regular income tax rate.

• Qualified dividends offer tax incentives but come with strict holding period requirements.

• If you invest in dividend paying stocks in an individual account, you will owe taxes on dividends, even if you reinvest the shares via DRIP. 

• If you invest in dividend paying stocks in a Roth IRA, typically there will be no taxes owed. 

People invest in dividend paying stocks for stability as a part of a diversified portfolio. A good portfolio will have a mixture of growth stocks and dividend based stocks, along with ETFs, REITs, and some higher risk speculative investments (typically no more than 5% of your portfolio a.k.a.: Money you’re okay losing). 

A high yield savings account, while great for your emergency fund, is not an investment. High yield savings accounts are also at rates we haven’t seen in nearly 20 years. You will not save yourself into retirement. You must invest. And a part of a diversified portfolio means investing in dividend paying companies or ETFs.