Investment Income: Stock, Mutual Fund, and Insurance Dividends
Total investment returns include both capital gains and dividend payments. Capital gains are nominal profits that result from strictly buying and selling an investment. Investors might also regularly collect dividends as income, while holding the asset. Dividends have actually accounted for 40% of all stock market returns since 1930. The dividend is of even greater importance through inflationary times.
Calculating Dividend Yield
Dividend yield is taken as a percentage and helps calculate the amount of future income expected per a lump sum investment. Stock market dividends are separate from bond interest. Corporations are legally obligated to honor principal and interest payments to creditors, while management pays dividends at its discretion.
Dividends are typically paid out and quoted quarterly. The Coca-Cola Company now trades at $59.82 per share, while paying out an expected $0.46 quarterly ($1.84 annual) dividend. The Coke dividend then calculates out to 3.08% ($1.84 / $59.82 = 0.0308 = 3.08%. We now expect to collect $3080 in Coca-Cola dividends through the course of one year, from a $100,000 initial investment.
Stock Market Investments and Dividends
Corporations finance themselves by either issuing debt or selling stock equity to investors. Corporations return capital back to owner-investors through dividends and stock buy backs. Dividends are typically paid out of corporate profits and free cash flow. Investors must buy and hold shares of stock prior to and through the ex-dividend date to collect dividends on the payable date.
Mature corporations are more likely to offer higher dividends – due to a lack of growth opportunities. In 2020, Exxon Mobil did borrow $23.2 billion to cover its dividend. That year, Exxon lost a staggering $23.3 billion through the Pandemic and subsequent collapse in oil prices. Exxon, for its part, has increased its dividend payment for 42 consecutive years, with a Dividend is King policy dating back to the days of Standard Oil and John D. Rockefeller.
Alternatively, a rapidly growing business, like Google, does not pay a dividend, so that it may preserve cash to finance real growth and moonshot projects. Apple pays out a meager 0.52% dividend yield, while spending more than $600 billion to buy back its own stock over the past decade. Expect technology companies to pay out little, if any, dividend income.
Mutual Fund Investments and Dividends
As larger investment pools, mutual funds offer both professional management and automatic diversification for smaller investors. Smaller investors will typically buy into mutual funds through 401(k) and 403(b) retirement plans. Mutual funds may be classified according to asset type, industry, and geography.
Mutual funds are required to pay out all net investment income to shareholders, in the form of dividends. Mutual fund dividends therefore include stock market dividends alongside bond and money market interest. All mutual fund dividends are taxed at higher ordinary income tax rates, as opposed to qualified dividends.
Mutual fund shareholders lack the control afforded to common stock shareholders. Here, investors may vote over issues concerning the fund, but are barred from directly influencing corporate policy for individual stocks.
Mutual fund managers will invest money at their own discretion, which makes it difficult for investors to budget for and time investment income. Rapid-fire trading activity within the fund will expose shareholders to hefty capital gains taxes.
Life Insurance Dividends
Life insurance is grouped into term and whole life policies. Term covers the insured’s life through a particular time frame. Whole life insurance is permanent, for as long as the insured makes his premium payments.
Whole life insurance does feature a savings component, where premium payments partially go towards establishing cash value. Cash value may be invested into money market securities and mutual funds. Life insurance Cash value grows as it earns dividends and may be withdrawn or borrowed against at any time.
Financial Strategy for Investment Income
Onyx Investments assumes that taking on greater financial risks translates into greater financial rewards. We observe a negative, inverse correlation between guaranteed investment income and real growth. Conservative savers should expect zero real returns on FDIC-backed money market deposit accounts.
As a group, our food stock investments in McDonald’s, Hershey, Starbucks, and Coca-Cola show the best balance of growth and income.
Still, Apple, Visa, Google, and Berkshire Hathaway shares have emerged as our best investments, by far, in terms of total returns. Google and Berkshire pay no dividends, while Apple and Visa dividend yields are always minimal.
Onyx does not transact business strictly based upon dividend yield and expected investment income. Corporate earnings are the real driver behind stock market performance. Strong profits finance capital spending, acquisitions, stock buy backs, and future dividends.
Interestingly, an extraordinarily high dividend yield is often times the marker of a flailing business with a rapidly deteriorating share price. In 2006, General Motors paid out a 10% dividend yield. By 2009, General Motors had eliminated its dividend altogether and declared bankruptcy.