Tuesday, October 2, 2012

Do You Know the Effective Return of Your Dividend Income?

Do You Know the Effective Return of Your Dividend Income?

Regular dividend paying stocks are good for long-term investment because these companies are making profit and they are well-managed. Their business is either transacted in cash or they are able to turn accounts receivable into cash quickly.      

Do you know your actual return of your dividend income? Check out the following: 

What is the par value of your shares?

When ABC Company pays a dividend of 20% per share and you are holding 1000 shares of $1 each, your dividend income is $200. However if the par value of your share is only 50 cents each, your income from a dividend of 20% is only $100.
If ABC declares a dividend of 20 cents per share you will get $200 irrespective of the face value of your share, be it $1, 50 cents or 10 cents.      

Is it taxable?

If the dividend is subject to a tax of 20%, your $200 and $100 dividend income will be reduced to $160 and $80 respectively. However if you are personally not taxable you can claim for the refund of the amount taxed. On the other hand if your tax bracket is more than 20% you will be taxed even more.

What is your effective return?

You bought 1000 shares of ABC Company at $5 share with a total outlay of $5000 (We ignore brokerage and other fees for simplicity sake), for a dividend of $200, your effective rate of return is only 4% (200*100/5000) 

Do your homework and invest in dividend paying stocks with better effective return.  

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