Make Millions With Dividends

How Smart Investors Make Millions with Dividend Stocks

Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.” (John D. Rockefeller)

When we invest in stocks of a particular company, we’re essentially acquiring a tiny ownership stake in a publicly traded entity. This means that the company’s ownership belongs to its investors, not private individuals. While our control over the company may be limited unless we hold a significant percentage of its shares, we still hold a stake in the company.

The primary objective of any successful business is to expand and enhance its profits. In its nascent stage, a business is in its developmental phase, recruiting talent, crafting products and services, establishing technological frameworks, with its growth trajectory often skyrocketing. Year after year, it may witness exponential growth, yet its net profit might be marginal or negative. After a period, typically spanning several fruitful years, the business succeeds in laying down its foundations, having built everything essential and garnered a loyal customer base and brand recognition. It reaches a pivotal juncture where profitability and cash flow surge, but growth slows down. Examples of companies reaching this turning point include stalwarts like Johnson & Johnson, Coca-Cola, McDonald’s, Verizon, Intel, and numerous others.

These companies at the tipping point are unlikely to revolutionize the game with groundbreaking innovations. However, that’s not necessarily detrimental. While they may not witness the same rapid growth, their profitability remains robust, as does their customer base. With hefty profits, these companies often find themselves pondering how best to utilize their funds to further business development. During the growth phase, they could allocate funds to research and development, talent acquisition, or technological acquisitions. But now, having accomplished much, they don’t need to reinvest all profits and can return a portion to their investors, the shareholders, in the form of dividends.

The term “dividend” originates from the Latin word “dividendum,” meaning “to divide.” Companies distribute dividends for three primary reasons:

  1. Rewarding investors: By sharing profits with investors, companies acknowledge their role as stakeholders deserving a share in the company’s success.
  2. Appeal to investors: Dividend payments enhance a company’s attractiveness to investors. Without dividends, it would merely be a profitable yet slow-growing entity, less appealing to investors seeking stable returns.
  3. Company resilience: Coca-Cola, for instance, has paid dividends consistently for over 100 years! Over the last 60 years, it has increased dividends each year. Such steadfast dividend payments are a hallmark of quality and reliability, reinforcing investor confidence.

Some intriguing insights about dividends:

  • Not all companies distribute dividends; it’s at the discretion of the company.
  • A company that pays dividends can halt payments at will.
  • Typically, American companies distributing dividends do so in 4 payments per year, though some pay monthly.
  • When someone mentions a company’s dividend amount as X, they’re usually referring to the annual dividend. Quarterly dividends are obtained by dividing X by 4.
  • Capital gains tax is levied on dividends received, the rate varying by country. In the United States, it’s 25%.
  • Dividends represent a fixed amount irrespective of stock price fluctuations. If a company pays a $5 dividend, it remains $5 regardless of the stock price rising to $100 or falling to $10.

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