Professional Documents
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Dividends
Stock market and price
growth
Shareholders are rewarded in two ways.
101
Firstly, the company may (yes “may” and,
perhaps, may not) pay dividends. These
represent a share of the post tax profits of
the business after the management has
Richard Willshire shows, how with a little homework decided how much to retain in the business
for its future needs. This is not the same as
and a bit of cash, anyone can learn how to trade interest on a savings account. The amount
of dividend each share earns will be the
O
n 6th March 2007 Royal Bank we’ll look at in a moment. However if total dividend distributed by the company
of Scotland shares were worth the management of the business you divided by the number of shares in issue.
602 pence each. By 20th invest in does not do a good job, does not So if a company pays out £1million and
January 2009 their price had fallen to make profits or grow the business, the there are two million shares then each
just 10 pence and the government had shareholders may receive no benefits at all share will receive 0.50p. Is this a good
had to step in and rescue the bank. and may lose their money. rate of return for the shareholder or not?
This will depend on the price at which they
Lesson number one, investing in Therefore a key concept is that owning bought the shares. If they bought them at
shares can be a rough ride. On the shares means sharing risk. And that £1 each then that’s a return of 50%. But this
other hand, if you had bought your is also why companies issue shares on is pretty unrealistic. In fact when you look
RBS shares on the day they bottomed public markets; to get shareholders to at some of the most well known dividend
out then by now, as the price sits share risk or reduce their own. When a paying shares, the “dividend yield” is very
at 49p, you would have more than company issues shares it may use the much lower:
quadrupled your money in not much capital it raises to grow its business.
more than 18 months. But it may also represent a big payday
for the existing shareholders of the Share Price (as at 21/9/2010)* Dividend yield
Why have a stock market? company, a time for the existing Royal Dutch Shell Plc 1912p 5.3%
This may not be quite as dumb a question shareholders to cash in their chips. Tesco PLC 435.70p 2.98%
as it sounds. The original reason is to For them the stock market represents
HSBC Holdings PLC 679.90p 3.20%
enable businesses to raise money though an “exit.” The new investor needs to
issuing shares. By buying them, investors decide if this means the company has BP Plc 417.35p Nil
become owners of these companies, in really run out of steam and that its best Source: The Financial Times / Hargreaves Lansdown
* Note – share prices on the London Stock Exchange are normally quoted in pence
exchange for various benefits, which is already behind it.
30 market
the market
the 31
What do share
prices mean?
What moves a share price up or down can be
divorced from the performance of a company.
For example, in the case of Royal Dutch Shell,
its business has not changed much since the
beginning of the year yet its share price has been
affected by events over at rival oil major BP.
32 market
the market
the 33