Sunday, 20 March 2016

I can get 4.72% Dividend Yield today

I have been asked what do I mean by Yield?  I answer you can get a solid 4.72% yield right now.  The answer comes back to me.  You mean 4.72% interest.  I have to reply back and say no, I can get a 4.72% yield for the year and it's guaranteed but can change day to day, its a little different than interest.

So the conversation stops right there in frustration for most novice investors.  It's a simple fact, people prefer to get more money back so when I say I can get a 4.72% yield for the year, they automatically start thinking about what they can get at the bank, a GIC at 1 to 1.4% locked in for 5 years?  A savings account that gives you 0.6% annually?  So when I so confidently say that I can 4.7% today, they look like I am talking witch craft.  "What do you mean you can that much?  I've never heard of that before, you make it sound so easy"

To explain my situation, i would need to first explain what an interest rate is and what a dividend yield is.

Interest Rate

When someone mentions interest rates, people always go straight to a GIC or a savings account and grip about how little it pays.  A plain vanilla GIC that you can get just by walking into a bank will give you interest in the range of 1 to 1.4% locked in for 1 to 5 years.  The longer term, the higher interest rate, say 2% interest in 5 years?  A savings account currently at any major bank (this does not include Tangerine or EQ Bank) will give you 0.2 to 0.8% annually.  This is the current climate in 2016 in Canada when the word interest rates are mentioned.  These are the 2 biggest generates of money from interest rates.

Dividend Yield

Simply stated, a dividend yield  is calculated by taking its dividend per share and then dividing it by its price per share.  The end result is then expressed in percentage terms.  A lot of jargon that you as a new investor does not need.  To help you understand how this simple calculation will get you 4.72% yield.  Go to Yahoo Finance and type in BCE.TO  Bell Canada Enterprises is considered a blue chip stock in the Canadian market, they are a solid company in Television, telecommunications. internet, sports, etc.  They have raised their dividend once a year for quite some time now.  When you get to BCE.TO click historical prices, then dividends only.  You see that the last dividend payment from BCE was 0.683 and they pay quarterly.  So the calculation is 0.683 x 4 = $2.732 and now dividend that by the current stock price which is 2.732/57.83 = 0.0472 or 4.72% dividend yield.  So if I buy BCE stock today, i will get a 4.72% yield?   Yes that is correct.  Now the stock price can and will change price, it will go up or down accordingly but the $0.683 every quarter does not change, the stock price will change and this will change the dividend yield but the dividends get paid every quarter.  If they pay monthly dividends, then the calculation where the 4 was, changes to a 12.

Final Thoughts

Buying stocks to get the dividend yield has its own risk and rewards and yes stock prices can do down and up and dividends can get cut but using historical data, there are more than enough blue chip stocks that will hike dividends every and so goes the price of the stock.  This hiking of the dividends helps smooth out the volatility in the stock market.   If you want to escape the under 1.5% interest rates locked in for 5 years that the banks give you, then you need to become a DIY investor and look into purchasing dividend stocks.  Think of it this way, the banks can get the same BCE stocks that I can as a DIY investor.  The BCE stock is also more liquid where I can sell any day I want while the GIC is locked in for years.  They use your hard earned money that you put into the GIC and take that money and they can buy BCE stock, they will get paid by BCE a yield of 4.72% and give you 1.4% in return.   It's a no brainer, the banks are making money on your money.  That term has been used for many years but finally I figured out one of the ways they were doing it.  You as smart investor can stop this cycle and get that 4.7% instead of the banks.  This is in my opinion, smart money, you money is working for you in one of the best ways it can.

If anyone has a question on dividend yields or interest rates, please leave a message.