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investing

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.

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the market
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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.

Press reports, notes put out by stockbrokers’


analysts, the buying or selling behaviours of large
shareholders, the general state of the economy
Some shares pay no dividend at all. and sentiment can all affect prices; quite apart
Take a look at BP in this table. It from any positive or negative news from the
formerly paid dividends at roughly the company itself. The investor has to make up his
same rate as Royal Dutch Shell but or her own mind about an investment and not
because of the explosion at its Macondo be swayed too greatly by the views of those who
well in the Gulf of Mexico it suspended provide the noise surrounding the stock market.
its dividend payments. Others pay no In a later article we will look at how to analyse
dividends because they have no profits stocks, what various ratios mean and how to
or they prefer to retain profits to grow arrive at buying or selling decisions.
their business. If their businesses do
grow and there is demand for their One early decision to take is whether to invest
shares then their shareholders may be in individual company shares, buy a basket of
well compensated by…. financial crisis. Secondly, charges payable to brokers shares in the form of an index tracker or whether
Price growth; the reason many prices go down as well as up. for looking after your to let a fund manager look after your stock
investors choose to invest in shares. Thirdly, buying and selling shares. market investments for you. We will look at
Let’s look at the same shares again: shares at the right times is these in a later article too but for the time being
vital for achieving profits. There will also be stamp duty something you might like to try is running a
Share Price (since 1/1/2010) Fourthly, it pays to invest in to pay at a flat rate of 0.5%, dummy or virtual portfolio. There are a number
companies you understand which will be deducted by of websites, publications and iPad or phone apps
Royal Dutch Shell Plc 1.94%
and can reasonably expect the broker. Then dividends that let you play around without having to spend
Tesco PLC 1.18% to do well but… The will be taxed at 10%, 32.5% any money. Try looking at The Financial Times
HSBC Holdings PLC -4.08% unpredictable happens. or 42.5% depending on your www.FT.com, Interactive Investor www.iii.co.uk
BP Plc -30.78% over all taxable income. The Share Centre www.share.com or Hargreaves
Source: The Financial Times
Costs Capital gains tax is payable Lansdown www.h-l.co.uk. This is fun but don’t
Buying shares involves costs on gains above the annual forget that unless your goal is to be a day trader,
as well as benefits. Firstly, personal CGT allowance, buying and selling shares all day long, with all
Not very impressive. In fact, in the dealing costs. These vary which is currently £10,100. the stress that that involves, you will probably
case of BP shares, pretty disastrous. depending on which broker All told it can be expensive be better off taking it slowly, analysing carefully
Other, faster growing companies you use and can be as low as compared with the profits what you want to invest in and waiting till the
may see their share prices grow very as £6 per trade but as much made, although if the shares time is right to make your purchases or sales.
rapidly in a short space of time. But as £15. Use comparison are held in a Stocks and There is no hurry. If you miss one opportunity,
there are several lessons to learn from sites such as www. Shares ISA or a Self Invested there’ll be another along sooner or later; just
this. Firstly, this is only a snapshot moneysupermarket.com and Personal Pensions, at least keep your (virtual) cash and wait. m
of the price progression since the www.which.co.uk/money/ the investor can avoid the
beginning of 2010. If, for example, savings-and-investments/ income and capital gains
the similar snapshot were taken for guides/stockbrokers- taxes. Charges are also Next month Richard Willshire breaks through stock
the first 9 months of 2009 the result explained/the-cost-of- disproportionate for smaller market jargen and examins how economy, inflation and
would be quite different, because the stockbrokers-compared/ to deals. The bigger the exchange rates affect share prices
stock market as a whole reached its check on this. Such sites will trade, the lower the
nadir in March of 2009 following the also indicate administration percentage cost.

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the market
the 33

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