Understanding Dividend and Bond Investing
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Questions and Answers

What does DRIP stand for in dividend investing?

  • Dividend Reinvestment Plan (correct)
  • Dividend Risk Investment Program
  • Debt Return Investment Program
  • Direct Return Investment Plan
  • What happens to the overall position of an investor when they reinvest dividends through DRIP?

  • The investor increases their wealth immediately.
  • The investor maintains the same overall position on the day of reinvestment. (correct)
  • The investor can access increased dividend payments.
  • The investor loses the original dividend payment value.
  • In a bond investment, what is the role of the bondholder?

  • The bondholder receives interest payments from the issuer. (correct)
  • The bondholder becomes a shareholder.
  • The bondholder participates in company profits.
  • The bondholder manages the company's operations.
  • Which statement correctly describes a crucial point about bondholders?

    <p>Bondholders only receive their interest payment regardless of company success.</p> Signup and view all the answers

    What type of return can investors expect from bond investments?

    <p>Fixed returns based on the interest rate</p> Signup and view all the answers

    When Apple issued $5.5 billion of bonds, what was the range of interest rates offered?

    <p>0.60% to 2.61%</p> Signup and view all the answers

    How do bonds serve entities like companies and governments?

    <p>By raising funds for a defined period with interest payments</p> Signup and view all the answers

    What is a common misconception about dividend investing?

    <p>Reinvesting dividends always increases overall wealth.</p> Signup and view all the answers

    What has historically been the performance comparison between small company stocks and large company stocks?

    <p>Small company stocks have outperformed large company stocks.</p> Signup and view all the answers

    Which statement reflects the historical performance of value stocks compared to growth stocks?

    <p>Value stocks have outperformed growth stocks over a long period.</p> Signup and view all the answers

    What effect did Fama's research have on market behavior concerning small and value stocks?

    <p>Investors began buying small and value stocks, reducing their premiums.</p> Signup and view all the answers

    What remains uncertain regarding the expected premiums on value and growth stocks?

    <p>It is unclear if they are shrinking, disappearing, or staying steady.</p> Signup and view all the answers

    Which of the following statements about the 3 Factor Model is presented in the content?

    <p>It is too early to determine the model's current validity.</p> Signup and view all the answers

    What happens to the value of a company when it pays dividends?

    <p>The value decreases by the amount of cash distributed.</p> Signup and view all the answers

    Why might some investors prefer companies that do not pay dividends?

    <p>They want the company to reinvest funds to grow.</p> Signup and view all the answers

    Which type of companies are more likely to pay dividends?

    <p>Established companies with less growth potential.</p> Signup and view all the answers

    What might indicate that a company has no growth opportunities?

    <p>The company regularly pays high dividends.</p> Signup and view all the answers

    What is one reason companies may choose to pay dividends?

    <p>To change their capital structure.</p> Signup and view all the answers

    What is a potential benefit of a company retaining its cash instead of paying dividends?

    <p>Increased market share and business growth.</p> Signup and view all the answers

    How might Berkshire Hathaway's stock value be affected if they had paid out millions in dividends?

    <p>It could be lower due to lack of reinvestment.</p> Signup and view all the answers

    What does WACC stand for in the context of corporate finance?

    <p>Weighted Average Cost of Capital.</p> Signup and view all the answers

    What percentage gain did the investment achieve over 40 months?

    <p>270%</p> Signup and view all the answers

    Which of the following statements about bonds is true?

    <p>Bond prices fluctuate less than stocks but still fluctuate.</p> Signup and view all the answers

    What is the annual interest payment on a $1,000 bond purchased at 5% interest?

    <p>$50</p> Signup and view all the answers

    If the market interest rate increases to 6%, how might it impact the bond purchased at 5%?

    <p>Investors will prefer the newer bond with a 6% return, decreasing the value of the 5% bond.</p> Signup and view all the answers

    What was the significance of Apple's wearables division in 2019?

    <p>It generated more revenue than 300 Fortune 500 companies combined.</p> Signup and view all the answers

    Which option presents the potential for profit sharing in a company?

    <p>Stocks</p> Signup and view all the answers

    What is a common misconception people have about bonds?

    <p>Bonds are perceived as low risk and safe investments.</p> Signup and view all the answers

    Why might someone choose to sell a bond before its maturity date?

    <p>Because they need immediate access to their funds.</p> Signup and view all the answers

    What is an asset class?

    <p>A grouping of investments with similar characteristics</p> Signup and view all the answers

    Why is holding cash considered a poor long-term investment?

    <p>Inflation gradually erodes its purchasing power</p> Signup and view all the answers

    What does the term 'Buy the Dip' refer to?

    <p>Keeping cash to invest after a market drop</p> Signup and view all the answers

    What is the primary challenge with 'Buying the Dip'?

    <p>Identifying the right moment to invest is difficult</p> Signup and view all the answers

    What is a potential drawback of saving cash to buy investments during a market dip?

    <p>Inflation could make the cash less valuable before investing</p> Signup and view all the answers

    What characterizes cash as an asset class?

    <p>It loses value over time due to inflation</p> Signup and view all the answers

    What is a common misconception about keeping cash on hand?

    <p>It is a foolproof strategy during volatile markets</p> Signup and view all the answers

    What happens if an investor waits too long to buy after saving cash for a market dip?

    <p>They risk missing out on potential gains in the market</p> Signup and view all the answers

    What is total return for an investor?

    <p>A combination of dividends received and increase in stock price.</p> Signup and view all the answers

    What was the dividend yield on January 16, 1995 for TD Bank stock?

    <p>1.18%</p> Signup and view all the answers

    How is the TRUE dividend yield calculated on October 5, 2023?

    <p>$0.96/$79.39</p> Signup and view all the answers

    Why is it incorrect to base your return on the original purchase price of a stock?

    <p>It ignores current stock valuation.</p> Signup and view all the answers

    If TD Bank's stock was valued at $79.39 on October 5, 2023, what is the annualized dividend yield based on the dividend payment?

    <p>4.84%</p> Signup and view all the answers

    What required condition justifies calculating a dividend yield based on current stock value?

    <p>If you sold the stock and repurchased it at the same price.</p> Signup and view all the answers

    What is the dividend payment TD Bank issued on February 6, 1995?

    <p>$0.06</p> Signup and view all the answers

    How often are dividends paid out that contribute to the annual dividend yield calculation?

    <p>Quarterly, allowing for an aggregated annual yield.</p> Signup and view all the answers

    Study Notes

    Investing Fundamentals II

    • The goals of today's session include examining stocks vs. bonds, asset classes, value vs. growth, market history, and gold.

    What is a Stock?

    • A stock represents a share in a company's ownership, including its assets and earnings.
    • Acquiring more stock increases ownership in the company.
    • Stocks, shares, and equity all have the same meaning.
    • Stockholders have a claim on the company's assets.
    • This entails ownership of various company aspects, including furniture, trademarks, and contracts .
    • Stockholders are entitled to company earnings and voting rights related to the stock.
    • A "public company" sells its stock on a public exchange like the NYSE or the TSX.
    • Stock in "private" companies is more difficult to buy and sell.
    • Public companies have a specific number of outstanding shares, which may increase (with new stock sales) or decrease (buybacks).
    • Stock prices change daily based on supply and demand—more buyers lead to higher prices, more sellers to lower.
    • Investors purchase stock to potentially gain capital gains (price appreciation) and dividends (company profits).

    Making $$$ With Stocks

    • Investors aim to profit from two primary sources with stocks:
      • Capital gains: Price increase upon sale.
      • Dividends: Payments from the company's profits.

    Company Value & Stock Price

    • Company value reflects the present value of future cash flows/income.
    • Estimating this value is complex and requires many assumptions. Factors affecting cash flow include:
      • Economic trends (growth/decline).
      • Competition.
      • New/failed products.
      • Government regulations.
      • Taxes.
      • Labour demands.
      • Inflation.
      • Interest rates.
      • Supply chain disruptions (as seen with COVID).
      • Societal trends (environmental, health, etc.).
      • Global conflicts.
      • Advertising blunders (different per region).
    • These constantly change, affecting the stock price.

    What is a Dividend?

    • A dividend is a portion of a company's profits distributed to its stockholders.
    • Dividends are typically paid in cash but can also be distributed as additional stock.
    • Companies aren't obligated to pay dividends.

    Do You Want to Invest in Companies That Pay Dividends?

    • When a company pays a dividend, its overall wealth decreases by the dividend amount.
    • Thus, the selling price of the shares will potentially decrease accordingly.
    • Some investors prefer to reinvest the company's cash in growth opportunities, while others prefer to collect the dividend cash.

    Which Companies Pay Dividends Often?

    • Banks
    • Insurance companies
    • Utility companies
    • Real Estate Investment Trusts (REITs)

    Which Companies Don't Pay Dividends Often?

    • Technology companies
    • Startup companies

    Companies Therefore Pay Dividends Because...

    • The company may not have a better use for the cash; for example, they may not see good opportunities for growth.
    • Companies may alter their capital structure (to lower their weighted average cost of capital), by distributing cash and borrowing.
    • Rebalancing is a strategy to achieve this by giving a portion of capital to the more profitable asset class.

    Should You Want a Company to Pay Dividends?

    • Reinvesting profits within the company may boost the stock price. Rebalancing a portfolio regularly also has advantages.
    • Whether a company should pay dividends depends on their long-term growth potential:
      • Companies with significant growth potential will hold onto cash, allowing them to invest in future expansion.
      • Established companies may pay dividends to rebalance their capital structure or distribute profits to shareholders.

    What Is an Asset Class?

    • An asset Class is a collection of investments that have similar characteristics, subject to similar laws and regulations, and often behave similarly in the markets.

    Main Asset Classes

    • Stock market investments
    • Real estate investments
    • Guaranteed investment certificates (GICs)
    • Term deposits
    • Savings accounts
    • Commodities (like oil, natural gas, wheat, and orange juice)

    Cash & Cash Equivalents

    • Cash includes cash, GICs, term deposits and savings. While technically an asset, it loses purchasing power due to inflation.
    • Money kept in cash should cover urgent expenses and be invested only as part of a rebalancing effort.

    Buying the Dips

    • The most crucial element of buying dips in the market is knowing when to buy as the market is dropping.
    • This can be challenging, as it's often a scary time to invest money.

    Types of Bonds

    • Corporate vs. government.
    • Short-term vs. medium-term vs. long-term.
    • Fixed-rate vs. floating rate.
    • High-yield vs. low risk.
    • Convertible vs. conventional.

    Types of Stocks

    • By capitalization/size
    • By geography
    • Growth vs. value.

    How to Think About Investing in Stocks

    • Stocks can be classified by size, geography, and growth/value.
      • Size: Mega cap, large cap, mid cap, small cap, micro cap
      • Geography: North American, international, emerging markets
      • Growth vs. value: Growth stocks and value stocks

    Geography

    • Divide your portfolio into geographic locations (like North America, International, Emerging Markets).
    • The big U.S. companies (S&P 500) offer a great deal of indirect international exposure.

    Emerging Markets

    • Emerging market economies (EMEs) display low-to-middle per capita income, expected to grow quickly.
    • These constitute about 80% of the global population and 20% of the world's economies.

    Size of Company by Market Cap

    • Using Market capitalization, we can divide companies into their respective sizes (like mega-cap, large cap, mid cap, etc.)
    • This is a simple formula using current market price per share multiplied by the total outstanding shares.

    Growth vs. Value

    • Growth stocks: Anticipated to grow considerably above average market growth.
    • Value stocks: Appear to be undervalued, performing well below their potential.

    Rebalancing

    • A rebalancing strategy will aid in adjusting your portfolio's weighting periodically.
    • -The rebalancing effort can involve buying underperforming asset classes and selling more profitable asset classes. --The result of rebalancing will be a more balanced portfolio allocation each year.

    Simple Portfolio Rebalancing Example

    • Example of rebalancing an investment portfolio regularly (typically once a year).

    Expected Returns

    • Discussing the potential returns from different investments and the reality of how returns may not meet the stated expectation.

    My Personal Approach

    • The investor's personal approach to investment strategy. Individual investor situations may differ, so it is best to choose what works best for each.

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    Description

    This quiz tests your knowledge on dividend reinvestment plans (DRIP), the role of bondholders, and historical performance trends in the stock market. It covers important concepts in both dividend investing and bond investments, exploring returns, risks, and models like the 3 Factor Model. Prepare to deepen your understanding of these key investment strategies.

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