hey guys it's Adrian here the Canadian in a t-shirt and today I'll be breaking down
the basics of dividends and I'll explain everything you need to know about
dividend investing I'll go over the dividend yield what the ex-dividend date
means the importance of the payout ratio and my overall dividend strategy this is
chapter 7 of my millennial investing guide so click the pop-up at the
top-right check out the previous videos in this playlist to learn more about the
basics of investing what are stocks bonds ETFs and mutual funds and how to
invest during a market crash in this video I'm going to assume that you
understand the basics of the stock market if you're a little rusty make
sure you've watched my previous video the stock market explained where I also
go over the difference between capital gains and dividends so click the pop up
at the top right to check out that video first and then come back to this one as
a quick recap when you own a stock you own a small piece of that company even
if you only own one single share you own a part of that company and so you are
entitled to a small portion of their profits stocks can earn you money in two
ways capital gains and dividends capital gains are simple if you sell the stock
for a higher price and you bought it for you've made a profit and that profit is
called a capital gain every single stock can earn you capital gains as long as
you buy low and sell high but certain stocks can earn you money an additional
way through dividends dividends are a percentage of a company's profits that
they pay out to investors like you and you don't have to do anything to earn
this money you don't have to sell your stock or put in any work or go to a
meeting as long as you own at least one share of that company you will receive a
dividend but the more shares you own the more money you'll receive in dividends
they are a great source of passive income dividends are an incentive to
encourage investors to invest for the long term because they are paying you
throughout the year with capital gains you only make money once the moment you
decide to sell your stock but with dividends you get paid many times every
three months or even every month but not every company pays out dividends newer
companies or companies in the tech sector like Tesla or Amazon are called
growth stocks and growth stocks do not pay dividends the only way to make money
with the growth stock is to sell it for a higher price than you bought it for
dividend stocks are usually more established companies called blue chip
stocks which have consistent and reliable income and they
share this income with their investors through dividends I'll be making a whole
video comparing growth stocks and dividend stocks but want to quickly make
the case for why dividend stocks are important and why should care about them
especially during a market crash with dividend stocks you earn money in two
ways you earn capital gains when you sell the stock at a profit but you also
earn dividends every step along the way with growth stocks there's only one way
to earn money and that's when you actually sell until you sell the stock
isn't doing anything for you I'm not saying avoid growth stocks it's
important to diversify and I invest in both growth stocks and dividend stocks
but here's an example to showcase how dividends can help you earn money even
during a market crash let's look at a growth stock like Facebook over the past
five years at the worst point during this 2020 crash in mid March Facebook
stock was worth a hundred and fifty dollars per share Facebook stock was
worth the exact same amount three years ago in April 2017 since this is a growth
stock these three years were wasted you didn't earn anything during these three
years if you bought Facebook stock three years ago it would have been the exact
same thing as if you bought the stock this year in March
you weren't rewarded at all for holding the stock over that time three years
later you ended up at the exact same point so that time was wasted let's
compare this with a dividend stock like TD again the low point during the 2020
crash was in mid-march the last time TD stock had a share price that low was in
February 2016 four years ago however these four years were not wasted because
you earn dividends every three months during these past four years
sure after four years the stock price returned to the exact same point so you
didn't earn any capital gains during this time but you earned a consistent
dividend of 4% every single year just by holding onto the stock this is one of
the reasons I love dividends I am always being rewarded for my time
in the market and my money is always working for me so that's an overview of
why I love dividends so much let's talk about the fundamentals starting with the
dividend frequency dividends are a source of passive income that you earn
just by holding on to your stock they're basically a paycheck that the company
pays out to you as an investor you can receive these dividends every year every
quarter or even every month the majority of companies pay
the dividends every quarter so you'll receive a paycheck from the company
every three months so four paychecks per year some companies especially REITs
real estate investment trusts pay out their dividends every single month
that's because these REITs make their income by collecting rent on their
properties and so as an investor you receive a portion of that monthly rent
through dividends the frequency of the dividend doesn't really matter sure it's
nice to receive monthly income but don't make this your deciding factor don't
invest in a company just because they pay a monthly dividend most of the
strongest and most reliable stocks out there actually pay a quarterly dividend
but I get this question all the time so if you want to find out if a company
pays out a monthly or quarterly dividend here's what you do go to a stock
analysis website like Yahoo Finance and look up the stock let's say TD click on
chart and at the bottom you will see icons every time they had a dividend
here you can see that TD pays out its dividend every three months so quarterly
if you want to see these dividends as a list click on historical data show
dividends and you'll see all the most recent quarterly dividends all the dates
you see here are actually the ex-dividend dates which I'll go over
later in this video let's compare this to a monthly dividend
like Pembina pipeline ticker symbol ppl and you'll see that they pay out a
dividend every single month now let's talk about how much money you earn from
dividends every single share you own in the company will pay you the exact same
dividend amount this is called the dividend per share it doesn't matter
when you bought the share all the matters is that you own it so how do I
find this number if I'm on Questrade and I look up the TD stock the dividend
per share is on the bottom left corner I can see that every single share I own
and TD will pay me a dividend of 79 cents every quarter if it's a monthly
dividend like Pembina this amount will tell you how much money I earn every
month in the case of TD every single share I own will pay me 79 cents every
quarter if I own a hundred shares I'll get paid $79 every three months it
doesn't matter when I bought the shares or how much I bought them for every
single share pays out the same amount I could have bought these shares 50 years
ago or I could have bought these shares today I would receive the same amount in
the next in payment this dividend amount of 79
cents per share is pretty consistent at least over the course of a year
dividends are usually only increased or decreased once per year and that's a
good thing if I own a hundred shares I can rely on that passive income of $79
every three months until they decide to change it if a company is doing well and
growing their profits they can crank up their dividend to keep investors happy
but if times get tough and profits drop they might decrease the dividend amount
and if something catastrophic happens like an economic crisis companies might
decide to cut their dividend entirely this is only done as a last resort and
companies try their hardest to avoid suspending their dividend since it will
significantly hurt investor confidence and their stock value will plummet I'll
talk more about the warning signs of a dividend cuts later in the video but the
point is that the dividend per share is pretty consistent so how do you actually
compare dividends from different companies if we look at Pembina pipeline
stock we see that they have a dividend per share of only 21 cents you might be
thinking wow they have a way smaller dividend than TD's seventy-nine cents per
share but you'd actually be wrong you can't just look at the dividends per
share to compare companies for one TD pays out its dividend every three months
whereas Pembina pays out a smaller dividend but they
pay out every single month okay so let's compare apples to apples let's
look at how much each stock pays out in dividends over the course of a whole
year TD pays out seventy nine cents per quarter there are four quarters in a
year so a single share of TD pays out three dollars and sixteen cents in
dividends every single year Pembina pays out 21 cents per month there are 12
months in a year so Pembina pays out two dollars and 52 cents every year these
two numbers are closer but it still looks like TD pays out a higher dividend
it's true one share of TD pays out more in dividends than one share of Pembina
but TD also costs a lot more to buy if you had a thousand dollars to invest you
could buy almost twice as many shares of Pembina as you could with TD so in total
your one thousand dollar investment in Pembina would earn you more dividend
income than one thousand dollars in TD these calculations we did to compare
these two stocks can be summarized with one number the dividend yield the
dividend yield is a percentage by taking the annual dividend amount per share
divided by the current share price in the case of TD
our annual dividend per share we found was three dollars and 16 cents and the
current share price of TD is sixty one dollars and fifty seven cents so if we
take three point one six divided by sixty one point five seven we get a
dividend yield of 5.1 percent if you don't want to calculate this number
yourself you'll see this dividend yield anywhere you look up a dividend stock on
Questrade if you look up TD stock you'll see the dividend yield towards
the bottom left you'll see the five point one percent under the yield
heading the actual dividend amount you receive every quarter is in the bottom
left the seventy nine cents under the div heading the dividend yield basically
means that if you invest $1,000 today you'll expect to receive 5.1 percent of
that or fifty one dollars every year in dividends let's do some quick math to
confirm that each share cost sixty one dollars and fifty seven cents so if I
have a thousand dollars I can afford sixteen point two shares you can't own a
fraction of a share so we have to round down to 16 shares of TD each share
please have 79 cents per quarter so my 16 shares give me 12 dollars and 64
cents every three months there are four quarters in a year so I would get an
annual dividend total of 50 dollars and 56 cents
so pretty much 51 dollars I just lose a bit of change since I can't own a
fraction of a share so the dividend yield tells you how much money you would
receive in passive income if you invest at this very moment I stress the at this
very moment part because the dividend yield fluctuates all the time it is not
consistent remember in the calculation the dividend yield depends on the share
price and the share price of every stock changes every minute of every day but
the actual dividend amount per share is constant
remember the dividend per share doesn't change over the course of a year until
they decide to increase or decrease the dividend but the price of a stock
constantly goes up and down over the course of a day if the stock price goes
up the dividend amount doesn't change but now you can afford to buy a fewer
number of stocks and so the yield decreases likewise if the stock price
drops you can now afford to buy more shares and each share still pays the
same dividend and so the yield increases that's what you're seeing right now due
to the market crash most stocks like TD have significantly dropped in value
since march of 2020 so TD's share prices dropped but its
dividend amount remains the same and so it's dividend yield has increased way
beyond normal in normal times TD had a dividend yield of around four percent
now it has a much higher yield above 5 percent and back in March at its lowest
point TD had an even higher yield well over 6 percent once its stock price
returns to normal its dividend yield will also return to its normal 4 percent
range but until then this is a great opportunity to buy this quality stock
and an unusually high yield check out my past video on some of the best canadian
dividend stocks to buy at a discount during this market crash now here is a
common mistake don't get super excited by stock just
because it has a very high dividend yield the dividend yield does not tell
you the full story so don't go chasing double-digit yields
of 15% or 20% those dividends are too good to be true and they will not last
if a stock has a 20% yield that means that you'll be making $200 a year off of
a $1000 investment that sounds awesome and it's true you will but that's
assuming that the company can sustain that massive 20 percent dividend no
company can support a 20 percent dividend for long and I don't know when
but eventually after a few months or even after a year that company will
either reduce its dividend or even worse you know cut its dividend entirely and
then you'll have zero income my rule of thumb is that any dividend yield greater
than 7 percent is a red flag and probably not sustainable don't get
greedy consistent and reliable dividends between 3 and 6 percent are far better
and far safer again do the market crash most stocks have dropped in value and
because of that some dividends which normally would be in the safe zone
between 3 and 6 percent have now been pushed beyond 7 percent those dividends
are probably still safe so this rule isn't black-and-white it's just a
general rule of thumb that I follow another warning just because the
dividend yield is less than 7 percent does not mean that it's safe you have to
look at bunch of factors like its amount of cash versus its debt but one of the
most important factors that I look for is its payout ratio I've talked about
the payout ratio and every single stock pick recommendation video that I've done
in the past. It's that important the payout ratio tells you how much
company's net income goes out as dividends you can find the payout ratio
of any stock on websites like Yahoo Finance search the stock like TD for
example click statistics and scroll down to see that TD has a payout ratio of
about 53% that means that TD pays out 53% of its net income out to investors
through dividends leaving it with 47% of its profits to invest in itself and grow
as a company ideally you want a low payout ratio anything below 80% is
usually good since TD has such a low payout ratio that means that they can
sustain their current dividend and maybe they can even afford to increase their
dividend very soon companies I warned you about with a
dividend yield greater than 10% almost always have a payout ratio above 100%
that means that they are giving away more money in dividends than they are
bringing in and so they are bleeding themselves dry just to keep their
investors happy if a company has a large payout ratio for a month or two they'll
probably be alright it could just mean that their profits have been down in the
short term but if a company consistently has a payout ratio above 100% year after
year their dividend is far too high and it's just a matter of time before that
company decides to cut its dividend and that's what you want to avoid instead
you want to look for a company with stable dividends or better yet look for
companies for the history of increasing their dividends the last thing I want to
talk about is important dates this is a question that I get all the time
Questrade said that my dividend would be today but I haven't got any money what's
going on the date you see on Questrade when you look up a stock is called the
ex-dividend date this is not the dividend payment date the ex-dividend
date determines who is eligible to receive the dividend and the dividend is
usually paid out a few weeks later looking on Questrade we can see that TD
has an ex dividend date of July 9th that means that anyone who own TD stock
before the ex-dividend date July 9th will receive a dividend if you bought TD
stock on July 9th or after you will not receive a dividend this quarter you'll
have to wait until next quarter you can't just swoop in in the last
minutes buy some stocks today and expect to receive a dividend tomorrow it takes
a while to process and to make sure that the millions of investors out there all
get their portion of the profits in the case of TD their next dividend it will
we be paid out on July 31st and if you want to qualify for that dividend you'll
need to buy TD shares before July 9th the ex-dividend date here's a cool thing
Once the ex-dividend date passes you will get that dividend no matter what
let's say on July 9th the ex-dividend date I decide to sell all of my TD stock
at that point I am no longer an investor in TD but I'm already locked in and so
on July 31st the dividend payment date I will receive my dividends in cash even
though I no longer own any shares in TD this is a good thing because if this
wasn't the case then no one would ever sell the shares after the ex-dividend
date because they wouldn't want to miss out on those dividends and if no one
will sell the shares then no one can buy shares for weeks at a time and that
would be a huge problem the very last thing I want to mention is what to do
with dividends you receive your dividends as cash and you can use that
cash to spend or pay down your mortgage or even save it but the best thing to do
with your dividend is to reinvest it using a DRIP. A DRIP is a dividend
reinvestment plan instead of receiving your dividend as cash you can use your
dividend to automatically purchase an extra share of that company free of
charge this allows your dividends to grow exponentially and totally on
autopilot you can just sit back and watch your
investments compound and grow year after year I made a whole video on drips and
the benefits that they offer so make sure you click the pop-up at the top
right to check out that video it's a great way to build off what you just
learned here and if you'd like to get started with Questrade which is my
favorite online broker click my referral link in the box below and you'll get $50
in commission free trade rebates for the first 30 days when you sign up that
basically means that your first ten stock trades will be commissioned free
that saves you $50 plus I'll get a small referral bonus as well so there you have
it that's everything you need to know about dividends they're a great way to
earn passive income even during a market crash
dividends are paid out annually quarterly or monthly the dividend amount
per share is usually constant over the year but the dividend yield fluctuates
with the stock price if the stock price goes up the different yield goes down
don't blindly chase stocks with high dividend yields make sure that they are
sustainable by looking for low payout ratios if you want to receive the next
dividend you'll have to buy stocks before the ex-dividend date and if you
want to get the most out of your dividends reinvest them using a DRIP to
get true exponential growth out of your investments thanks for watching guys and
be sure to LIKE comment and subscribe if you found this video helpful
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next video on the best US dividend stocks in 2020 Thanks everyone and
I'll see you guys on the next episode of the Canadian in a t-shirt bye guys