How do companies make their stock more inciting for potential investors?
One method we are learned in this week’s course material is the Dividend Preference Theory or bird-in-hand. This theory accurately reflects the reduction in risk that investors face when investing in stocks that offer regular pay-outs per share owned (Ehrhardt & Brigham, 2015). These payouts are referred to as dividends.
In essence, if an organization has a poor performing year, these guaranteed payouts will offer investors a return on their investment. These dividends are usually reinvested into more stock, which over time, can accelerate the growth of a portfolio over a long-time horizon, such as a decade.
I currently work for Microsoft so I will use them as an example. Microsoft has increased its dividend payout consistently since 2004 (Dividend History for Microsoft, 2019). Currently, their quarterly dividend is $0.51 per share, per quarter. This is effectively a 1.5% yield. The latest dividend increase represents a 10.9% increase from $0.46 – a confidence booster for investors. Annualized, at the current price of $140, this dividend equals $2.04 per share with a dividend yield of 1.5%.
For example, consider someone owns 1,000 shares of Microsoft, which has a 1.5% yield, and consistently increases its dividends similar to its history. Based on a dividend calculator, this person would have earned $28,439 in only from dividends (Dividend Calculator, 2019). If these payouts were reinvested, they can purchase more and more stocks, earning more from stock increases, and earning even more dividend payouts.
The graph below shows the quarterly payouts for the past 5 years (Dividends and Stock History, 2019).
Resources
Dividends and Stock History. (2019, October). Retrieved from https://www.microsoft.com/en-us/Investor/dividends-and-stock-history.aspx.
Dividend Calculator: Total Returns. (2019). Retrieved from https://www.mywealthtrace.com/dividend-calculator.
Dividend History for Microsoft Corp (msft). (2019). Retrieved from https://www.streetinsider.com/dividend_history.php?q=msft.
Ehrhardt, M. C., & Brigham, E. F. (2015). Corporate finance a focused approach (6 ed.). Boston, MA: Cengage Learning.
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