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Dividends Explained For Kids

Dividends are a super cool feature of investing. Let’s learn more about them!


You’ve probably heard the word ‘dividends’ tossed around when adults talk about money, but what does it mean? Think of it like this: you’ve got a favorite candy store, and instead of just buying candy, you buy a tiny piece of the store itself. Now imagine that store gives you a small portion of its profits as a thank you for owning a piece of it. That’s basically what dividends are. Intriguing, isn’t it? Stick around; a whole world of dividends is waiting to unfold in front of you.

Understanding the Term ‘Dividends’

Let’s explore the concept of ‘Dividends,’ a key term in the world of finance and investing. In simple terms, a dividend is a portion of a company’s earnings that’s paid out to shareholders. You can think of it as a reward that companies give to their investors for trusting them with their money.

To understand this better, let’s consider an example. Imagine you’ve invested in a company by buying its stocks. The company then makes a profit. Now, instead of keeping all the profits to itself, it decides to share a portion of those profits with you and other investors. That share of the profit you receive is called a dividend.

The amount of dividend you get depends on two main factors: the number of shares you own and the company’s overall profit. You’ll receive a larger dividend if you own more shares or if the company has made a significant profit.

It’s also important to note that not all companies pay dividends. Some prefer to reinvest all their profits back into the business for growth. However, those who pay dividends are often seen as financially stable and reliable.

How Dividends Are Earned

So, you’re probably wondering how you earn dividends. Well, it’s not as difficult as you might think. First, you need to invest in a company’s stock. This means you buy a tiny piece of that company. Now, when that company makes a profit, it might decide to share some of that money with its investors—that’s you! This money you receive is what we call a dividend.

Of course, not all companies pay dividends. Some might prefer to reinvest their profits back into the business. However, companies that do pay dividends will typically do so on a regular schedule, like every quarter, half-year, or year. You don’t need to do anything special to earn these dividends – just hold onto your stock.

But remember, the amount of dividends you receive depends on how many shares you own. If you own more shares, you’ll receive a larger dividend. It’s kind of like a pizza – the more slices you have, the more pizza you get to eat! So, the key to earning dividends is to invest wisely and hold onto your shares.

Types of Dividends

Now that you understand how dividends are earned, it’s time to explore the different types of dividends companies may distribute. There are mainly four types: cash dividends, stock dividends, property dividends, and scrip dividends.

Cash dividends are the most common type. When a company makes a profit, it can decide to share a part of that money with its shareholders. This money is called a cash dividend. You’ll receive this dividend based on how many shares you own.

Stock dividends are a bit different. Instead of getting cash, you’re given additional shares in the company. This means you’ll own more of the company without having to buy extra shares.

Property dividends are rare, but they do happen. These involve the company giving shareholders assets other than cash or stock, such as real estate or physical goods.

Lastly, we’ve scrip dividends. Instead of cash or assets, the company gives you a promissory note. This note is a promise to pay you a dividend in the future.

The Role of Dividends in Investing

Understanding the role of dividends in investing can greatly enhance your financial growth. These payments can provide a steady stream of income in addition to the potential profits from selling your shares. When a company you’ve invested in is doing well, it might decide to share its success with its shareholders by issuing dividends. This is like getting a little thank-you gift for trusting in them.

Investing in dividend-paying companies can be a smart move for several reasons:

  • Steady Income: Dividends can provide a regular income stream. This can be particularly helpful if you’re saving for a specific goal, like a new bike or a video game console.
  • Reinvestment: You can use your dividends to buy more shares of the company. This can help your investment grow over time, even if the company’s share price isn’t increasing.
  • Buffer against Market Fluctuations: Sometimes, the value of stocks can go down. But if a company pays dividends, you’re still making some money, which can soften the blow.

Fun Facts About Dividends

Let’s explore some intriguing facts about dividends that might surprise you. First, dividends weren’t always cash. In the past, companies often paid dividends in additional shares of stock or even in products they produced. Just imagine getting paid in chocolate if you had shares in a chocolate factory!

Next, not all companies pay dividends. Some, particularly newer or fast-growing companies, prefer to reinvest all their profits back into the business. These are often high-risk, high-reward companies where you hope the share price will skyrocket.

Lastly, there’s something called ‘dividend yield’. It’s a fancy term that tells you how much a company pays in dividends each year relative to its share price. So, if a company’s dividend yield is high, you’re getting a lot of dividends for your money!

How Your Parents Can Help You Learn More About Dividends

While you’ve learned some interesting facts about dividends, there’s still more to explore, and your parents can be a great resource for enhancing your understanding. You might be wondering, ‘How can my parents help me?’ Well, there are a few ways they can assist you.

  • They can help you understand the concept of dividends in a practical way. As an example, if they own stocks in a company that pays dividends, they can show you how they receive this income and what they do with it.
  • They can encourage you to save and invest your money, teaching you the value of compounding and how dividends can contribute to it.
  • They can guide you through real-life examples from the stock market, helping you understand how dividends work in the real world.

Dividends Are a Great Financial Benefit

So, buddy, dividends are like birthday presents from companies you’ve invested in. They say, ‘Thanks for believing in us! Here’s your slice of the profit pie!’ Pretty cool, huh?

The more shares you own, the bigger your slice! Now, dividends might sound a bit tricky, but with your parents’ help, you’ll become a dividend whiz in no time.

Remember, investing isn’t just about making money fast; it’s about steadily growing your wealth. Happy investing!

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About the Author

David McCurrach

David McCurrach is the founder of Kids' Money. Following a career working in finance for several banks and credit unions, David started Kids' Money in 1995 and has since published three books on kids' financial literacy and allowance programs.

Last updated on: May 10, 2024