A little less than a year ago, in November 2012, I had just paid off all of my student and car loans and had accumulated just enough money to begin investing seriously. I researched different types of accounts and brokerage services before opening a Roth IRA with E*Trade. I contributed the maximum allowed amount ($5k) in 2012 and 2013. Most of this I chose to invest in VTSMX, a Vanguard mutual fund, but I also invested smaller amounts in other dividend-producing stocks. Today, after reviewing a dividend notification on E*Trade, I thought “Wouldn’t it be fun to see just how much money I’ve made over the past year from dividends alone?” which inspired me to create this post.
For investing newbies out there (20-somethings like me): A dividend is a payment made by a company to its shareholders, as a way to distribute its profits. Many people reinvest these dividend amounts, and others use the cash elsewhere. Money made from dividends is to be thought of separately from money made by a stock price going up. For example: If you buy 100 shares of FakeCo Inc at $50 a share, that will cost you $5000. Let’s say that they pay a dividend of 25 cents per share per quarter. Three years later the stock price is exactly the same ($50/share) so you sell your stock and get your $5000 back. So what was the point? Well, over those three years you would have made (25 cents) * (100 shares) * (12 quarters of a year) = $300. Hopefully the market value of your investments goes up also, but dividends are a nice bonus. I heard somebody once compare trading stocks without dividends to trading baseball cards.
Anyway, after thinking to myself how interesting it would be to know exactly how much money I’ve made from dividends over the past year, I looked it up: $287.94
This is wonderful! To borrow an analogy from MMM, every dollar I have invested is one of my little employees, and these dividends are the bacon that they bring home. This essentially free money that I spent no effort earning through my own labor represents an additional gain of roughly 2% of my Roth IRA savings.
And that is the power of dividends, produced by stocks and/or mutual funds that you plan on owning long-term. As I invest more and more in the coming years I look forward to seeing this number grow. Just because you’re young, don’t be daunted by beginning and investing your retirement savings; see what can be accomplished in just a year!