LEVEL 3 GLOSSARY
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Retained Earnings
If you're expecting a dividend check and end up empty-handed, it could be because the company decided to keep the earnings and put them back into the business. This money, and all other earnings the company keeps, are called retained earnings. The amount of a company's retained earnings can be found in the shareholders' equity section of the balance sheet.
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Liability
Think of this as debt, but then cast the net a little wider. Liability is the obligation to repay its loans, IOUs, payroll, leases, pensions, vacation hours, and taxes a company owes.
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P/E Ratio
Stocks work hard for the money, so hard for it honey—ahem. P/E ratio is "price-to-earnings": it tells you how much you’re paying for the earnings that a share is generating. For those of you who are visual learners, P/E Ratio = price per share / earnings.
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Dividend Yield
Put your dividend dinero into a percentage: a $1 annual dividend for a $10 stock has a 10% yield.
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Earnings Per Share
This is the amount of money earned per every one share. If the company made $1 million in profits and has 1 million shares outstanding, the EPS would be $1.
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Dividend
Not all companies pay dividends, but when they do, you should say "Cha-ching!" Dividends are payments the company makes to their shareholders. They're a way of giving the shareholder a piece of the profit pie.
See full glossary
In Level 3, we'll introduce you to the advanced concepts of investing. Just like the first two levels, there will be some concepts and one quiz. Ace the Level 3 quiz and people will be very impressed when they see your Report Card. So dig in, have fun, and ace that quiz! Good luck!
- The role of risk
- Diversification
- Corporate actions
- Dividends
- Reinvesting
- Issuing more shares
- P/E ratio
- LEVEL 3 QUIZ
Dividends
What we'll learn:
1) What it means to "issue a dividend"
2) Are dividends good or bad?
3) Does it matter if a company issues a dividend or not?
So let's say you're running your lemonade stand and you're doing pretty well. You've opened more stands in different parts of the neighborhood, people love to drink your special recipe, and the money is pouring in ("pouring" in — get it?).
You're happy because your business is succeeding, and your shareholders are happy too because the value of their investment has gone up. Fantastic.
But your shareholders can't really "make" any money unless they sell their shares, and they don't want to do that because your company is so awesome.
But wait, there's another option: You could issue a dividend. That means you use some of the money you're making in the business and pay it back to your shareholders as a way of saying, "Thanks for investing with me."
So when dividend time comes around, shareholders get a check for a percentage of the money they have invested. (It's called the "dividend yield," if you must know.)
So if your cousin Joe owns 10 shares worth $100 each, he has $1,000 worth of stock. If you pay a dividend of $3, that means the dividend yield is 3 percent ($3/$100). In other words, Joe will get a 3 percent return — or $30 — on his $1,000 investment.
You're welcome, Joe.
That sounds great for shareholders, but are dividends a good idea for the company?
By paying a dividend instead of investing that money back into the company, Joe and your lemonade stand might be losing an opportunity to grow even more.
You could always invest in nicer uniforms, fancier stands, and even cups with your cool logo on them. Which may or may not increase the overall value of the company, but it's something.
That's called "reinvesting," by the way, but we'll talk about that in the next write-up.
If you're thinking that a dividend is a great way to get people to buy your stock, you're way ahead of the game. Many investors like to focus on companies that pay dividends because they're simply interested in getting that "free money."
These guys are called income investors.
But paying a dividend isn't as important as the history behind your dividend. If a company has paid a dividend for 20 years and has never lowered it, then that's a strong sign that a company is stable.
Because having a dividend is great, unless you have to slash it or cut it entirely when times get tough.
What we'll learn:
1) The term "dividend" comes from the arithmetic operation of division: If a / b = c then a is the dividend, b the divisor, and c the quotient.
2) In 1967, Warren Buffet's Berkshire Hathaway (BRK.A) paid out its first and only dividend of 10 cents.
3) High-growth companies rarely offer dividends, because all of their profits are reinvested to help sustain their higher-than-average growth.
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