Making free money
If there was something that pulled me to investing, it was the prospect of earning money without doing a thing. The idea that I could earn money without working was fantastic. So how do we make free money?
The truth is that nothing is free. The prospect of getting free money is bleak, except if one of your relatives decides to slide some few coins to you. But if you insist, here is how to make free money.
Dividend Investing
The idea of dividend investing is that since some companies pay dividends to their shareholders periodically, usually every quarter, an investor can own a large amount of the company’s stock, benefiting from the dividends the company pays out. As long as you own the company’s stock before a date called the ex-dividend date, you are entitled to the dividend paid by the company. This is passive income 101.
The goal of dividend investing is to one day accumulate a portfolio of income-producing stocks, which would bring in a large amount of dividends every month/ quarter. The magic point is where the dividend income exceeds the expenses of the dividend investor.
For example, Warren Buffett’s Berkshire Hathaway is estimated to own 400 million shares of Coca-Cola stocks with a cost basis of $1.299 billion. Coke paid $1.68 per share in 2021 and this is calculated to bring Berkshire Hathaway $672,000,000 in dividend income. This means that he recoups his initial investment every two years. While it is a great return, it is possible to have something similar.
Dividends are paid directly to you/ your bank account.
There are a lot attached to dividends. Here are some essential things to know about dividends:
It is not compulsory for a company to pay dividends. Therefore, not every company pays dividends. Some of the biggest companies you know do not pay dividends, such as Meta (aka Facebook), Tesla, Amazon, and Alphabet Inc A (aka Google).
Also, a company that has been paying dividends can refuse to pay dividends; however, this usually is an indication that the company is going through some hard times. An example of a company that paused dividends was Nokia. It has, however, resumed paying dividends.
Dividend income is taxable. If you own stock that provides dividends, they are taxable in most countries.
Some companies have paid dividends for the past 100. Companies that have paid dividends consistently are known as dividend aristocrats.
Dividend Aristocrat is a company in the S&P 500 index that has paid and increased its base dividend every year for at least 25 consecutive years.
The Dividend yield
The dividend yield is the ratio of dividend per share to the price per share (dividend/price). It is expressed as a percentage. It shows how much a company pays out in dividends each year relative to its stock price.
Compare two companies, A and B. Company A’s stock trades at $10 and pays annual dividends of $1 per share to shareholders. Suppose that Company B’s stock trades at $80 and pays a yearly dividend of $1 per share.
This means Company A's dividend yield is 10% ($1 / $10), while Company B's dividend yield is only 1.25% ($1 / $80).
Dividend yield = Dividend per share/ share price
Lastly, investors should not judge a company/ stock solely by its dividends. It is essential to check the overall financial health of the company. Remember that a company does not pay dividends today does not mean it won’t be tomorrow and vice versa.
To read more on dividends, here are a few articles
Newsletter Recommendation: Young Money
Disclaimer: This article is for informational and educational purposes only and should not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.
Further disclaimer: I have positions in one or more of the stated securities.