A dividend is a payment made by a corporation to its shareholders, usually as a distribution of profits. When a corporation earns a profit or surplus, the corporation is able to re-invest the profit in the business and pay a proportion of the profit as a dividend to shareholders.
me: Got it kids?
me: Okay, what about this? When a company makes a bunch of money they take some of that money and give it back to whoever owns stock.
me: So remember, we are buying stocks. And each share of that stock means that we own that one tiny piece of the company. So when the company makes money, we get a piece of that money.
them: That makes sense.
me: Here look at this.
them: $4.32? That's it?
me: Well, yeah, it's not a lot of money, but they usually give that to you every three months. So just from that one stock you get a "free" $1.50 every month. That's not so bad, right? Plus you own other stocks like Target that pay dividends too. And the more money you invest, the more shares you will own, and the more money you'll get.
them: Yeah, that's pretty cool.
me: But not every company pays a dividend. Some companies want to keep that money so they can use it to pay for things the company needs in order to try and make even more money.
them: Okay. Can we go swimming now?
me: Good talk. Good talk.
My kids are eight and ten, so these conversations are generally kept short and sweet. Repeated every few months, they'll continue to sink in. I figure that as they get older, understanding things like dividends, yields, and how they create income, will just be second nature—as obvious and intuitive as reading and writing, but for some reason much less focused on.
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