Thursday, October 01, 2009

Newbie mistake in dividends

Let's say you have reit A with 10% dividend yield at $0.40, then another reit B with 10% dividend yield at $1.00, which would you buy?

Reit A, because it's cheaper so with the same capital I can own more so I'll get more dividend? That's what I thought till I calculated it out. Here it goes:


Supposedly I have $4000 to invest. For reit A, I can buy a total of 10 lots (4000/0.4 = 10,000). Thus, at the end of the year, I'll have a total of $400 in dividends. (0.40 x 0.1 x 10,000)

For reit B, I can buy a total of 4 lots (4000/1 = 4,000). For this reit, I'll have a total of.... ahem...$400 at the end of the year too (1 x 0.1 x 4000).



I was a little caught by this result. Haha, newbie mistake...tsk tsk... Conclusion - dividend yield depends on the dividend amt declared and the price of the stock you bought. If both stocks have the same dividend but one is cheaper in price than the other, it will not affect the amt of dividends you have if you have a fixed amt of capital to invest.

7 comments :

Anonymous said...

Percent.

Financial Freedom said...

Ha.. So other than yield, does it make more sense to buy the $0.40 or the $1.00 REIT?

Musicwhiz said...

Ultimately, it's yield that matters. The nominal value of the security will determine if it's afforable on an absolute dollar basis, but you can always limit your position if you have insufficient funds.

Cheers,
Musicwhiz

Createwealth8888 said...

If you believe both have upside potential, choose $0.40 REIT as every up bid for $0.40 REIT = $500 while every up bid for $1.00 REIT is only $400. See the difference.

If you think both REITS have downside, not time to buy yet.

financial freedom said...

CW8888,

Very good answer. I am sure that could be one of the factor to decide.

But on the other hand if the reit happens to be $2, then every down bid will affect the higher price reit more

Delly News Blog said...
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tiredman said...

Agreed. However, this maybe a bit too general.