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Dividends Shmividends! It’s one of the best investment strategies out there. Investing in companies that have the ability to raise their dividends is huge. Stay with me on this one because there is a key lesson here on what this means for your own business, and it’s valuation.
What is a dividend? A company has profits. Sometimes they reinvest the profits back into their business, and then they can choose to pay the rest out to shareholders. The rest of that money that is paid out is called a dividend.
If you buy stock in a company that raises the dividend over time, that’s an incremental amount of money you would get each year. It’s like being a kid and getting a bigger allowance every year on your birthday.
Check out this hypothetical example.
Let’s say you bought stock in Automatic Data Processing (ADP), the payroll company, at $42 in Jan 2008.
In 2008, it paid a dividend of $1.16 per share. So that is a 2.70% yield.
Here’s the math.
1.16 = 2.70%
42
Every year, ADP has raised its dividend, meaning it grew its business enough each year to be able to afford to pay shareholders a larger dividend.
Today, the dividend is expected to be $1.74. So ADP has raised the dividend from $1.16 to $1.74. That is a 50% increase from the dividend you were getting back in 2008.
So you were making 2.70% on your money. But now, because ADP has raised its dividend, you are now making 4.70% on your money.
Here’s the math.
1.74 = 4.70%
42
Source: Automatic Data Processing, Investor Relations
Dividends are one of simplest ways to value a stock. In the above example, it’s one of the main reasons why the ADP stock price (as I write this) is at $73!! Remember, dividends are just cash flow payments that you get as a shareholder.
Who doesn’t want their business to be worth as much as possible?
How about we think of your business as a stock! You have revenue, expenses and profits. When I say profits, I am referring to how much money your company makes after you pay yourself a draw or salary, and reinvest money back into your business. That’s the money that we can consider to be dividend money.
The larger the dividend, and the more it increases over time, the more your business could be worth.
There are 2 ways you could grow your company’s dividend.
1. Grow sales
2. Cut expenses
If you plan on selling your business to fund your retirement or just cashing out, you need to show this rising dividend stuff to an investor. It could make your biz worth way more. Who wouldn’t want to invest in a business where the ROI increases over time?
Just because your business is private doesn’t mean that you can’t think of your business as a public company. Yes, you don’t have to answer to shareholders. But you still have to answer to the largest shareholder in the world. You!
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