Suppose that on July 1st 1992 an investor purchased 100 shares of Starbucks stock at its closing price of $23 per share. What percentage of this initial $2,300 investment in Starbucks does the investor now receive annually in dividends?
A. 5% ($115)
B. 25% ($575)
C. 100% ($2,300)
D. 220% ($5,120)
This example illustrates a key principal of a free market economy – entrepreneurs come to capital markets with business ventures that need funding, and investors supply equity capital to those ventures with an expectation of receiving a future share of the profits. Prices reflect the level of confidence around eventual profits and cash payouts.
The Starbucks investor had to wait 18 years before receiving any cash return from the Starbucks enterprise (Starbucks paid its first cash dividend in 2010). Today the $0.20 per quarter dividend on Starbucks shares pays the same investor roughly $5,120 annually, or 220 percent of his original investment of $2,300. As financial theory would suggest, Starbucks stock price has factored in this potential dividend generation ability over the years, which explains why the original 100 shares (now 6,400 shares after six stock splits) have a current market value $363,520.
This example is not meant to suggest that we should spend our time trying to identify the next Starbucks. That’s probably not a worthwhile endeavor. It would have been nearly impossible to predict the future success of Starbucks. Instead this is a good illustration of why we invest. We provide an enterprise with capital today in anticipation of getting a share of profits in the future.
But there is another lesson here.
If we only focus on the dividend payers of today we may miss out on the biggest dividend payers of tomorrow (remember Starbucks went 18 years without paying a dividend). A broadly diversified strategy, including both dividend payers and non-dividend payers, will help ensure we capture the potential rewards of both.
Also In this Issue of Investment Guide
Social Security Benefits in a Low-Yield World
A Reader Inquires
Index Reconstitution: The Price of Tracking
Insider Trading: What is it and Why Investors Should Care
Recent Market Statistics
The Dow Jones Industrials Ranked by Yield
Recommended Investment Vehicles
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