By Mervin Medel
How many millionaires do you know
who have become wealthy by investing
in savings accounts? I rest my case.
– Robert G. Allen: author of finance books
If your bank gives you interest, the company you own in the stock market gives you dividend. Well, if you have money in a bank and a shareholder as well of that bank, you receive both.
There are actually two ways to make money in the stock market. One is price appreciation and second dividend. For the moment, let me sideline the first, I will talk about this in my future articles, and focus on the second one.
What’s a dividend? There are two kinds, stock and cash. Again, let me write about the second type. It’s the money distributed by the company to its shareholders out of its profits or reserve. Most blue chip companies do give dividends regularly, though some do not.
If you happen to be a member of a credit cooperative, you do receive dividend right? Private companies do distribute dividends as well. I had a classmate then in the graduate school whose family is a stockholder of a well-known private school in Metro Manila. They receive dividends annually. Some publicly listed companies do the same.
Sad to say, in almost all seminars I attended, price appreciation is given much emphasis. Dividend is just mentioned in passing, if mentioned at all. Here’s what I tell, never underestimate what it could do to your pockets. Mind you, even during the financial crisis in 2008 and 2009, good companies still gave dividends to their shareholders.
Let me now illustrate to you two of the most generous companies in the Philippine stock exchange, TEL (PLDT) and GLO (Globe), which are both into communication business.
Let’s do some arithmetic now. If you happen to buy shares of TEL during the first half of 2013 at its peak price of P3,290 (AU84.64) and held on up to now, you would have received an accumulated interest (or called dividend yield) of 7.54%* (kindly see the footnote). Not bad as compared to what a bank can give.
Remember that buying it at a high price of P3,290 during that time is a worst case scenario. If you bought it at a much lower price, your dividend yield (total amount of dividend divided by the price you paid for every share) is much higher than 7.54%.
Next, let’s assume you bought shares of GLO during the first quarter of 2013 at its peak price of P1,220 (AU$31.39). If you still have its shares until now, you would have an accumulated dividend yield of 10.10%** (see the footnote). Not bad for a passive income.
Do you remember my story with DMC in my last article? Since I held it for three (3) years, I received dividends in 2011, 2012, and 2013. Before I sold it last year, I had a dividend yield of 6.66%; I wouldn’t get that from a bank. The beauty of passive income is that you do nothing yet you receive something.
Warren Buffett has an amazing story about dividends he receives from his investment in Coca-Cola Company. He bought shares of Coke in 1988 and until now he still has them (wow, that’s 26 years of holding shares!). And he is not planning to sell.
Here’s the catch: in the near future he will receive dividends that would equal the amount he paid for the shares of Coke he bought! That’s crazy! It would then be like paying nothing for the shares of Coca-Cola.
Again, time is the friend of the wonderful business. It’s like marrying an excellent business through thick and thin, for richer and for poorer, ‘til death do you part. Over time, your dividend beats a bank interest with a big margin.
*TEL declared a total dividend of P248 a share since the first half of 2013 to the present, November 2014. So, P248/P3,290 gives you 7.54%.
**GLO declared a total of P67 dividend in 2013 and P56.25 this year 2014. So, P123.25/ P1,220 gives you 10.10%.
Disclaimer: Stocks that are mentioned are not recommendations for you to buy or sell them.
