| Year | Dividends | Yield on cost | Value |
|---|
Dividends are paid once a year and, if reinvested, buy shares at that year's price. Before taxes and fees. An illustration, not a forecast.
How the math works
Each year the holding pays the current dividend per share times the number of shares. The dividend per share grows by the dividend growth rate, and the share price by the price growth rate. With reinvesting on, the dividend buys more shares. "Yield on cost" is that year's dividends divided by what you first invested.
Examples
Berkshire Hathaway and Coca-Cola. In his 2022 letter to shareholders, Warren Buffett wrote that Berkshire finished buying its 400 million Coca-Cola shares in 1994 for a total of $1.3 billion. The dividend that year was $75 million. By 2022 it had grown to $704 million a year, about 54% of the original cost every year, without Berkshire buying another share. That is what dividend growth does over almost three decades.
Dividends can be cut. In 2009, after the financial crisis, General Electric cut its quarterly dividend from 31 cents to 10 cents a share, its first cut since the 1930s. Anyone counting on that income lost about two thirds of it overnight. A dividend is a company's choice, not a promise.
Explain it like I'm 13
Picture an apple tree. You buy it once, and every year it gives you apples. Those apples are the dividend.
You can eat the apples, or plant their seeds to grow more trees. If you plant them, next year you have more trees, and more apples, and so on. A healthy tree may also give a few more apples each year as it grows. But a bad season can mean fewer apples, which is why you should not count on any one tree.
Questions
What is dividend yield?
The yearly dividend divided by the share price. A $100 stock that pays $3 a year has a 3% yield.
What does reinvesting do?
Each dividend buys more shares, and those shares pay dividends too. Over long periods this can make a large difference.
Are dividends guaranteed?
No. Companies can cut or stop dividends at any time, and many did in 2008 and 2020.