Back in the day, the hillbilly TV Show Hee Haw song, “You Were Gone” is about a boy wanting his girl back. You might could say the same thing about wanting your dividend back when you gave them all away… to your investment advisers!
A dividend is money a corporation pays to its shareholders. Dividends normally come from profits earned and are paid on “per share” basis. Most large, mature companies that are publicly traded pay dividends to its shareholders.
Let’s say you own 1,000 shares of a company that trades at $100 per share. The value of your investment is $100,000. One year, that company earns $4 per share and it decides to pay $2 of it per share in dividends. You will earn $2,000 (1,000 shares times $2 per share). Remember, you earn this $2,000 in exchange taking the risk of buying the shares. The yield on those dividends is 2% ($2,000 payment divided by $100,000 value).
In June, 2019 the average dividend yield for S&P 500 stocks was 1.85%.
You might be thinking that you buy mutual funds and they don’t pay dividends. Actually, with mutual funds you still receive dividends because they purchase stocks. You’re just sharing those dividends with the other mutual fund investors.
How Investment Fees Take Your Dividends
Investment advisors are those who manage your money such as a mutual fund company or advisors you meet with face-to-face or over the phone. In addition to charging commissions, they often charge you a percentage of the assets the manage on your behalf.
Let’s say you hire an investment firm to manage your money, and that firm charges you 1% (typical fee). Let’s assume they invest your money in mutual funds that also charge you 0.85%. So, the total you pay is 1.85% per year.
This percentage may not seem like a lot, but by taking a look closer, your entire dividend has gone to investment advisers under this scenario. Phht, they’re gone!
Why is this so important? Because if you’re giving away all of the earnings in stocks you purchase, you should reconsider your entire investment strategy. Of course, you also benefit from a stock price’s growth over time. But giving away your portion of the earnings is probably be a mistake.
Carefully Consider Investment Fees
How much are you paying in investment fees. Find out. If you’re paying a high percentage, perhaps you should be finding an adviser who charges less than what you’re paying in exchange for what you’re getting. To learn more, download Tilly’s Guide to Smart Investing.
Don’t be left “here all alone.”