Section 1.9: DIVIDEND INCOME

Transcription

1 Section 1.9: DIVIDEND INCOME OBJECTIVES Understand the concept of shareowners splitting the profit of the corporation they own. Compute dividend income. Compute the yield for a given stock. Compute the interest earned on corporate bonds Cengage Learning. All Rights Reserved Key Terms dividend dividend income income stock yield growth stock preferred stock common stock corporate bond face value matures Chapter 1: The Stock Market 1

2 Dividend Income and Vocabulary 1. Shareholders are entitled to portions of the corporation s profit. A dividend is the profit that is split among shareholders. 2. Money received from dividends is called dividend income. Dividends are usually paid annually or quarterly. Board of Directors of the corporation sets the dividend for one share of stock. Some corporations do not pay dividends because profit is being used to improve or grow the company, or corporation does not have a profit. 3. Stocks that pay dividends are called income stocks, since they provide owners with income. Examples for 2017: General Electric (Symbol: GE), AT&T (Symbol:T), Wells Fargo (Symbol: WFC), WelltowerInc(Symbol: HCN), Verizon (Symbol: VZ), United Parcel Service (Symbol: UPS) Dividend Income and Vocabulary 4. The yield of a stock is the percentage value of the dividend, compared to the current price of the stock per share. Yield Yield can be used to compare dividend income to the interest that could have been earned in another investment 5. Some investors are not concerned with dividend income. Investors that are looking to buy stocks low and sell high are interested in buying growth stock. Some stocks can be both an income and a growth stock. Examples for 2017: Disney (Symbol: DIS), Qualcomm (Symbol: QCOM), LinkedIn (Symbol: LNKD), Amazon (Symbol: AMZN), Tesla (Symbol: TSLA) Chapter 1: The Stock Market 2

3 Dividend Income and Vocabulary Preferred Stock Preferred stockholders receive dividends before common stockholders. Types of Stocks Preferred stockholders receive a set dividend which does not frequently change. Preferred stockholders are entitled to assets and earnings of a company if it goes out of business. Common Stock Common stockholders receive dividends after preferred stockholders. Common stockholders receive dividends only when the board of directors elect to issue them. Common stockholders are only entitled to assets and earnings of a company, if it goes out of business, after preferred stockholders. Source Chapter 1: The Stock Market 3

4 Why do companies issue preferred stock? Preferred stock carries unique features: Represent ownership of the company Pay a set amount of interest to the investor Typically accounts for less than 10% of a company s overall source of funding Companies often issue preferred stock for a specific funding purpose A preferred stock is often considered a fixed-income investment In 2012, GE Capital issued preferred stock in three deals: Issued to boost capital Deals were marketed to individual or retail investors June 12, 2012: Preferred Stock Series A July 27, 2012: Preferred Stock Series B May 29, 2012: Preferred Stock Series C Example 1 JP Morgan Chase is scheduled for a dividend on October 3. If you own 250 shares of the company and will pay $1.60 per share in an annual dividend, how much will you receive in your annual divided check? Example 2 Ford Motor Company announced the annual dividend of $.13 per share. If you own 500 shares of Ford, how much did you receive on a quarterly dividend check? Chapter 1: The Stock Market 4

5 Example 3 Miranda owns 2,000 shares of a corporation that pays a quarterly dividend of $0.51 per share. How much should she expect to receive in a year? Example 4 Kristen owns common stock in AT&T. The annual dividend is $.46. The current price is $35.24 per share. What is the yield of the stock to the nearest tenth of a percent? Example 5 Dr. Washington owns 125 shares of United Parcel Service stock. UPS pays an annual dividend of $2.68 and closed at $98.29 on Tuesday. Express the yield of UPS at closing on Tuesday, rounded to the nearest tenth of a percent. Chapter 1: The Stock Market 5

6 Dividend Income and Bonds 1. Corporate Bonds are a loan to the corporation from the investor. The corporation agrees to pay the bondholder back with interest. Dividend Income and Bonds Corporate Bonds at a glance: Interest is usually paid annually or semi-annually. Corporate bonds are usually for $1,000 or $5,000 and this amount is called the face value of the bond. The face value of the bond is paid when the bond matures. The maturity date of a bond is a date in the future when the principal invested will be repaid to the investor. Time to maturity can be short or as long as 30 years. At maturity, the investor will receive the original amount invested back from the corporation. Bondholders do not share in company profits and are not owners, like stockholders are. Bonds are considered less risky and less potential rewards. Chapter 1: The Stock Market 6

7 Example 1 Adam bought a $1,000 corporate bond in the Green Mountain Company. The bond pays 5.7% interest per year. (a) How much does Adam receive in interest each year from this bond? (b) If Adam holds the bond for 11 years, what is the total amount of interest he will receive from the company? Example 2 Mr. Jacobsen purchases a $5,000 corporate bond from Enron in the year The bond was scheduled to pay 4.37% interest per year for 30 years. If Mr. Jacobsen held the bond for 2 years, how much interest did he earn? Example 3 A stock paid an annual dividend of $2.14. The stock split 2-for-1. What is the annual dividend after the split? Chapter 1: The Stock Market 7

8 Example 4 One share of a preferred stock pays an annual dividend of $1.20. On Wednesday, the stock closed at $34.50 with a net change of $0.50. What was the stock s yield at Wednesday s closing price? Round to the nearest hundredth. Example 5 On Thursday, the stock closed with a net change of $0.63. What was the stock s yield at Thursday s closing price? Round to the nearest hundredth. Chapter 1: The Stock Market 8