by The Investor on February 15, 2008
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Most of us get into investing because we want freedom, whether from office bores, traffic jams or the drudgery of a mortgage. We want to be free from having to work for a living.
Why then are most money-motivated books called things like The Millionaire Next Door
or Secrets of the Millionaire Mind? A million isn’t what it used to be, but it’s still more than most of us need for financial freedom.
What we’re really looking for is a replacement for our salary. The number on your pay check is the number you need to beat to retire early. If your monthly wage turned up in your bank account no matter what you did, wouldn’t you feel pretty financially free? You could quit work the next day if you wanted, although there’s no reason to take to the golf course – you could get a fun job, work for charity, or do all sorts of other exciting things instead.
Why you should consider targeting income instead of capital
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by The Investor on September 5, 2007
“Buy! Buy! Buy!” shout the city folk in blue braces from one side of the trading pit. “Sell! Sell! Sell!” retort those with red neckties.
Whatever happened to “Wait! Wait! Wait!” wonders your writer?
These days sharetrading is conducted via computer – the trading is often done automatically according to decisions made by the computers themselves – and the drama of the buyers and the sellers at loggerheads is consigned like steam engines and home brewing to our rosy-tinted memories of yesteryear. Institutions and individuals alike now haggle over shares in front of screens that blink red and blue, with more arrows, buttons and switches than a computer game.
When trading platforms look like fruit machines, it’s no wonder investors behave like short-term gamblers. But there’s a way of profiting from holding shares that requires no selling at all, by receiving the (generally) twice-a-year dividend.
The dividend is the money a company pays every shareholder out of its retained profits, as a reward for holding its shares. It’s too often forgotten that as a shareholder in a company, you’re a part-owner in its business. The dividend you receive is your share of the annual earnings.
Annually, the amount paid out by companies in the London stock market as dividends is about 2-3% of the entire market capitalisation. Some shares pay more: several UK banks, for instance, are currently paying the equivalent of over 6% of their market capitalisation in annual dividends. Others, typically high tech or loss-making companies, don’t pay any dividend.
The amount paid out as a percentage of your shareholding (such as the 6% just cited) is called the yield of the share. There’s more detail elsewhere on Monevator.com regarding calculating the dividend yield; for now it’s enough to know that shares paying relatively high dividends are known as high yield shares.
Do the small percentage returns from dividends sound dull to you? Sure, you won’t hear much about dividends from excited market pundits on CNBC and Bloomberg, who prefer to scream that the price of Wibbly Wobbly PLC has fallen by 0.2% in early morning trading.
What if I was to tell you that over the long-term, the bulk of profits made from investing in the stock market have historically come from receiving and reinvesting dividends?
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