Tuesday, 13 December 2016

Dividends

It's been long enough since my last post that basic settings have changed. Oh, how old habit die, and die some more.

Been a funny few months. Moved to back Montreal, fighting a very, very, very, annoying injury, ran the Toronto Waterfront half in a terrible time, and started a new postdoc. The postdoc, unlike the race, has been great. I got to visit China in November; specifically the Sichuan and Guangxi provinces.






On a meta level, the concept of a career is less well defined to many these days, including myself. No want for work, but rather a want for time horizons. What to do in one year, 5 years, 10 years? My parents, and many family members have had single jobs for longer than I ever will. To put things in context, my dad has been at the same career for 35 years now. Were I to have one of a similar length I would retire at 70. That's fine, but it's a different perspective.

What did I do instead of run? Good news is this site has a backup plan, which is write whatever I damn well please.

I learned precious little this year about stocks. I wrote before about the Black-Scholes equation. Basically how this equation it doesn't much apply to modern finances in any useful way.

I have much more fondness for Dividend stocks, which (usually) pay out at regular intervals that are either monthly, quarterly, or annual. Usually payouts are consistent, such a Bell, who at it's current value pays out $0.68 quarterly a share, and shares are priced around $58. They have not missed a payout since 2008.

Many people choose to use dividends as a form of supplementary income, but you can also automatically reinvest payouts in the form of new stock (Dividend reinvestment program, or DRP). This only works if the total of the payout is at least worth one share. For the case of Bell, you'd have to own about 85 shares, or $5200 worth in stock to make this work. If you did start with this amount, a new share would be bought, which would earn you $0.68 more the earlier quarter. Not exactly exciting, yet.

It occurred to me that it would interesting to calculate how much initial capital C would required such that the reinvested amount would itself be enough to buy you a new share. This would be a very non-linear regime.

Let S be the share price
 Dbe the amount received per share S per payout period
 CNL be the non-linear point were are interested in measuring

I found the result is the following formula:

For example, suppose we return to Bell, you would need 583/0.68252 = $418,869 in order to truly benefit from the DRP. That is, $418,869 means initially owning 7221 shares in Bell. This number of shares earns you back $4928 in cash every 3 months. But this payment also then buys you 85 shares, itself enough to buy a single extra 'bonus' stock! Even with this amount, the curvature is slight until observed over 10+ years.



So to conclude, yes, instead of saving the world or reading the great works of literature, it's been a new hobby to waste time on silly number games.


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