Tag Archives: stock

Financial Independence 101: What are Stock Dividends and Stock Splits?

This is a continuation of my Financial Independence blog posts related to financial education. I’m creating the blogs so that our two sons that will be graduating college soon will have a better understanding of personal finance.

What are Stock Dividends?

Profit is the amount of money a business has left over after paying all its expenses (revenue – expenses). The goal of most businesses is to make a profit because it adds value to the business and allows it to grow.

Stock dividends and stock splits

So what happens if a business makes a profit? They can take that profit and reinvest some of it back into the business to allow them to build better products and services. But many times, there is still money left over after that. When this happens, the business will normally give part of that money back to those who invested in their stock. This is done with a dividend.

Not all companies pay dividends, especially startups. They normally want to keep all of the profits to reinvest into growth. But well-established companies will often pay dividends.

When looking at your investments, you must look at stock appreciation and dividends to calculate the total return on investment.  For example, if you purchase stock A for $100 per share and stock B for $100 per share and both grow to $125 per share after the first year, your return on investment is 25% on each. However, if stock A also paid a 5% dividend, your return on stock A is actually 30%, so it is a better performing stock for you.

Dividend paying stocks (or mutual funds) can be great investments once you retire because they normally pay those dividends quarterly. When they pay the dividends, you can spend that money on retirement expenses.

What are Stock Splits?

When companies grow and are more profitable, the price of their stock tends to rise. Once the stock price rises over a certain price (normally around $150 per share), companies look for ways to reduce the stock price so that smaller investors can purchase shares. This is accomplished with a stock split.

Stock splits

With a stock split, the company will cut the price of their stock but will give their stockholders more shares. For example, if a company’s stock is $200 per share, they may cut the price to $100 per share but give all their existing shareholders twice the number of shares that they had before. This is called a 2 for 1 stock split. They can also split it by any denomination. In the previous example, they could have done a 4 for 1 split, reducing the cost to $50 per share but giving each stockholder 4 times the number of shares than they had before the stock split.

Conclusion

Now that you have an understanding of stock dividends and stock splits, let’s get to the bottom line. Once you start your career, set aside money for savings and have that money automatically deducted from your paycheck. Start with 15% of your paycheck, more if you can swing it.

Open up a Fidelity account and begin contributing money to a few mutual funds. If you want to really diversify, I suggest these 4 funds to invest equal amounts in:

  • FUSVX – A mutual fund that invests in S&P 500 stocks
  • FSEVX – A mutual fund that invests in small and mid cap stocks
  • FSITX – A bond fund that invests in credit-worthy bonds (note: if you are young and have 30 or more years before you retire, you may consider delaying the purchase of bonds for a while since you will not care as much about market fluctuations).
  • FSIVX – A mutual fund that invests in international stocks (like those in Europe).

aMemoryJog Web - Best Password Manager

Finally, track your budget and investments with an online tool. Personal Capital is an excellent tool for this and best of all, it’s free**. This is a great start to financial independence!

About this Blog

Steve and his wife built a software company, sold it and retired early. Steve enjoys blogging about lifestyle freedom, financial independence, and technology. If you like this blog, subscribe here to get an email each time he posts.

If you like this post, you might also like these prior posts:

What do you think of these financial independence training articles? Leave me a comment to let me know your thoughts!

Follow me: Twitter  |  Facebook  |  LinkedIn  |  Subscribe to this Blog

aMemoryJog - Best Password Manager for iPhone

Market Correction: Don’t Freak Out!

On Friday, the Dow Jones tanked by about 500 points and today it quickly dropped about 1,000 points after the opening of the bell. I track my personal finances with Personal Capital (an incredibly robust tool that is actually free to use).

One of the cool things about Personal Capital is that it will send you email alerts letting you know when specific things are happening. On Sunday, I received an email from personal capital with this subject: Your Portfolio is Down by -4.48%.

Portfolio Down

Now this could be a bit unnerving. My portfolio is down almost 4.48% (but I am doing a bit better than the S&P 500). After years of investing, I see this market correction as a temporary blimp. Markets tend to self-correct about every 18 months and we are overdue. The last adjustment was in 2011.

Why am I not Freaking Out?

It is human nature to freak out when things like this happen. I’ve seen people rush out and sell their stocks when the market tumbles, selling at their lowest point. This makes no sense, this is the time to buy — stocks are on sale!

aMemoryJog - Best Password Manager for iPhone

When the market tanked in 2007, I knew an older couple that cashed in their 401k and put that money into an old broken down cabin. They got penalized for early withdrawal, sold their securities at their absolute lowest and invested in a money pit that made things much worse. Had they simply waited it out, their 401k would be worth much more now than it was before the 2007 crash.

Here’s Why I’m Not Freaking Out

Our portfolio consists of stocks, bonds and cash, here is the breakdown thanks to Personal Capital:

Portfolio Allocation

First Level of Protection

As you can see, I have over 5% of my portfolio in cash. I can pull from that cash account for my monthly expenses without selling a single stock, so I am not forced to sell when stocks are low.

Second Level of Protection

You will also notice that bonds make up over 14% of my portfolio. Let’s say that the stock market decline sticks around for more than 6-10 months and I need cash for living expenses. When stock prices go down, bond prices go up. So I can easily cash in some of my bond funds when they are actually making money, selling high instead of selling low.

Conclusion

If you’ve invested in a balanced portfolio, there is no need to freak out, simply wait it out. If you are in a stock-only portfolio, try not to touch the stock. In fact, try to invest more now in low-cost index funds, they will increase once the market correction has passed.

Disclaimer: I am not a financial adviser, I am just sharing my experiences with you so invest at your own risk.

About this Blog

Steve and his wife built a software company, sold it and retired early. Steve enjoys blogging about about lifestyle freedom, financial independence and technology. If you like this blog, subscribe here to get an email each time he posts.

If you would like to download a free copy of Personal Capital, you can do that here.

Follow me: Twitter  |  Facebook  |  Linkedin  |  Subscribe to this Blog