Understanding what owning stock means is not always easy, especially when your retirement account actually owns shares of a mutual fund and not individual stocks. The simple answer is stock represents a partial ownership in a company. As the value of the company goes up and down so does the price of the stock. This will be explained in a separate post.
There is another benefit of owning stock that a lot of people aren’t aware of, but it is very easy to understand and it is called DIVIDENDS.
When companies are new they often need to keep their extra money (or profits) to be used to grow their business. In other words if a company sells bicycles and receives $100,000 from its sales to customers but spends $90,000 to make the bicycles and run the company it has a profit of $10,000. New companies often keep the $10,000 to be used to grow the business or in other words, invest it back into the company. If the investment works, the company could become worth more in the future. Once a company has established itself it often gives some of the extra money to the people who own the company, the shareholders. For instance if the bicycle company decided to pay 4% of profits back to the owners then that would be $400 ($10,000 X .04 = $400). If there are four owners who each own a quarter of the company then they each get $100 ($400 X .25 = $100). That’s the simplified version of dividends.
So how does that work in the real world? A company like Apple has billions of shares of stock owned by millions of people. They recently paid dividends of $0.57 per each share of stock that is owned. So if you owned 10 shares you would receive $5.70. On May 12 of 2016 Apple gave its stockholders about $2.9 billion of its profits, that’s real money.
So how does that work in the real world, FOR YOU. If you are putting money into your retirement account you most likely own mutual funds. Again, explaining a mutual fund is best for another post but here is the simple explanation. Lots of people invest their money in a mutual fund and that mutual fund uses everyone’s money to buy shares of stock in tons of companies. If a lot of those companies pay dividends, that money goes to the mutual fund, which uses it to buy more shares of stock.
So, Where Is My Christmas Present?
Different companies pay dividends at different times of the year but mutual funds usually pay them around the end of each calendar quarter. It’s about that time of year so go unwrap your present. To do this you have to be investing in your retirement account. If you aren’t, then it’s time to start so you can get a present next Christmas. If you are then log into your account and see if your present has already been delivered. Mine was delivered on December 23rd just in time for Christmas. Once you’ve logged in you probably have to go to your “Transaction History” or a similarly titled link. The Transaction History will show each time you added money to your account which is called a “Purchase”. These purchases happen on payday. The dividends are called “Reinvested Dividend” because that’s exactly what they are. They are dividends that were paid in cash to you and used to buy more shares.
For officers in the Phoenix area if you don’t know the website it’s probably something like your city plus “DCP” for Deferred Compensation Plan. Phoenixdcp.com, Tempedcp.com, Mesadcp.com and so on. If that doesn’t work ask a coworker with some time on or someone from Human Resources. They should know, and if they don’t then most likely nothing they say about finances is worth listening to.
Some of my coworkers have received over $1,000 for Christmas and remember that’s just for this quarter. Dividends are often paid at the end of March, June, September and December.
Need An Idea For A New Years Resolution?
While you are logged into your retirement website go ahead and also increase your contributions since you are already there. Click on the link that says “Contribution Information” or something similar that shows how much you contribute each paycheck and click to change it. Remember the more shares you have the more dividends you get.
Finally, if you are worried that you can’t afford to contribute another $100, how about another $75? Once again, this needs further explanation in another post but give this a try. Increase your contributions by whatever you are comfortable with, let’s say $100, and look at your next paycheck. Your paycheck won’t be $100 less it will be closer to about $75 less. I’ll show you a simple example.
If you make $25 an hour and work for two weeks (80 hours) you earn $2,000 ($25 X 80 = $2,000). That means you are in the 25% tax bracket, so your paycheck is $1,500 ($2,000 X .25 = $1,500). $500 was taken out for taxes. Again, this is oversimplified and leaves out state taxes, social security, health insurance, etc.
If you put $100 into your retirement account then it comes right off the top (pretax). In other words even though you still earned $2,000 you are taxed on $1,900 so when you pay your 25% taxes your paycheck becomes $1,425 ($1,900 X .25 = $1,425). $475 was taken out for taxes. So you can see that you saved $100 but your paycheck only went down by $75 ($1,500 – $1,425 = $75). And you saved $25 in taxes.
That’s a three way bonus. You save $100 but your paycheck only goes down by $75. You pay $25 less to the government (and everybody loves that). And you start getting Christmas presents (Dividends).
Merry Christmas, Happy Holidays or whatever!