The Motley Fool Previous Page


If You're a Business Owner, Here's How You Pay Yourself

http://www.fool.com/investing/general/2012/08/20/if-youre-a-business-owner-heres-how-you-pay-yours.aspx

Brian Stoffel
August 20, 2012

A few months ago, I wrote about why going public isn't all it's cracked up to be. In explaining my reasoning, I mentioned: "Many people think that when they buy a company's shares, they're actually giving money to the company. Unless you're participating in the initial (or secondary) public offering of a company, the money is just going to the person who's selling you the stock."

A day later, I got an email from a reader asking me to explain this. To give a real-world perspective on this, I told him to think about someone -- let's call him Mike -- who is buying a used Ford. When Nancy offers to sell her car to Mike, Mike pays Nancy. Ford doesn't see any of the cash from that transaction. Ford got the money when a dealership paid for it (akin to an initial public offering).

The difference between buying a stock from someone and buying a car from someone is that you can use the car to do lots of different stuff while you own it. The stock share itself doesn't have much daily utility, despite the fact that you're legally a part owner of the company you hold.

In fact, aside from voting on company issues -- which is important -- all you can really do is wait until a later time and sell the stock to someone else. Of course, it's a little more complicated than that, but to many people, this realization makes owning stocks seem pointless and silly.

There is, however, a distinct exception to this "wait and sell" approach: dividends. Unlike shareholders of companies that don't give regular payouts, shareholders of dividend-paying companies not only get to vote on company issues, but they also get steady payments from the companies they own.

There's no more direct route for the average American to share in corporate profits than dividend payments. Take a look at the returns for the S&P 500 over the past 60 years with and without dividend reinvestment:

Source: Yale University, Fool.com.

If you pay $10 for a share of a stock that has a $0.40 dividend payment -- or a 4% yield -- that stays the same for the next 25 years, the company will have fully reimbursed you for your share, and whatever you sell it for will be pure profit. That's not a bad deal.

The even better news is that there are some companies out there that consistently raise their dividend and only use a healthy amount of earnings to make these payments each year. Below are five companies most of you should be familiar with, some of which have a record of increasing dividends.

Company

What It Does

Dividend Yield

Payout Ratio

Consecutive Increases

Disney (NYSE: DIS  ) Entertain people 1.2% 20% 1 year
Coca-Cola (NYSE: KO  ) Quench people's thirst 2.5% 52% 49 years
Procter & Gamble (NYSE: