Assessing dividend results.
In record keeping, we multiply dividends per share times the number of shares we own. This results in how much dividend income we are receiving for that payment period. If dividend reinvestment is in place, we then divide the amount of dividend payment by the price per share to determine the number shares we are purchasing with our dividends.
This is straightforward.
Let’s take an example.
Let’s say we have 100 shares of a company. Say the current share price is $10 per share and the dividend yield is 2%. That means we will receive an annual dividend of 20 cents per share. Since we have 100 shares we multiply 20 cents per share times 100 shares, meaning we will receive a total of $20 in dividends per year.
Twenty cents per share per year is five cents per quarter per share, for a total of (100 shares times five cents) $5.00 for the first quarter.
If dividend reinvestment is in place, we can easily see that our five dollars will buy us half a share for the first quarter. That means we then own 100.5 shares.
While we multiply five cents per share times that number of shares to determine the total dividends received for that quarter, we can easily see that our $5 will buy half of a share ($5 dividend divided by $10 price = 0.5, or one half).
Thereafter
Since at the start of the second quarter we are owners of 100.5 shares, the dividends we will receive at the end of the second quarter is the dividends per share, which is five cents, times the number of shares owned (which is 100.5). Therefore dividends received are $0.05 times 100.5, or $5.025. Assuming the price is still stable at $10 per share, we will now own an additional 0.5025 share (total dividends for the quarter of $5.025 divided by the price of $10 per share gives us 0.5025).
Then we are owners of 101.0025 shares (100.5 shares plus 0.5025 shares = 101.0025 shares). Immediately we see the compounding power of dividend reinvestment. We have added more than one full share in just two quarters.
Every quarter we will nominally increase the number of share we own simply by not changing anything. If we are fortunate, and the company’s business prospects increase, the company may later increase its dividend per share amount. And in the real world, prices are not stable, so we cannot assume the share price will remain the same. As a result, we cannot predict with exact accuracy what the amount of dividends will be in the future, nor what our share count will be in advance. There are future share count remains unknown until they are issued.
Let’s now turn our attention to the third quarter. Since we start the quarter with 101.0025 shares, and each share pays 5 cents per share, which is a total of $5.050125. If the price of the stock is still $10, this purchases 0.5050125 shares. As a result we now own 101.5075125 shares (101.0025 plus 0.5050125).
In the fourth quarter, we have 101.5075125 shares paying 5 cents each, for a total of $5.075375625. This can purchase 0.507537563 shres. We add 0.507537563 to 101.5075125, for a total of 102.015050062 shares.
So, within one year we have added more than two shares, just for holding on.
If dividend payment was only once a year, at the 2% yield, the frst year we would have added exactly two shares. But since we had quarterly dividends, we own slghtly more than two shares. This illustrates the power of regular reinvestment. While small difference, over time, this compounding adds up dramatically.
Final notes. This description has the phrase “… price of the stock is still $10.” In reality, that would never happen. Stock prices move all the time, so the likelihood of the price being a stable $10 is nil. Additionally, most numbers with multiple decimal points sometimes get rounded to a fewer number of digits. And you may experience a dividend increase along the way. Your mileage may vary.
Do you do dividend reinvestment? Let me know here.
Illustrated is a segment from “Treatise Concerning the Properties and Effects of Coffee,” a 1792 document by Benjamin Moseley. Courtesy The National Library of Medicine, Bethesda, Maryland
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