Most investors rely on stocks price appreciation to grow their investments. For example, you decide to spend your P 10,000 to buy 100 shares of Jollibee (PSE:JFC) at P100 per share. After two months, news came out that JFC opened up a new branch in China, making investors project that there will be increased earnings. As a result the stock price appreciate to P110. Your gain from your investment at this point is P1,000. (P10 price increase x 100 shares).
This investment approach works fine if the stocks continue to appreciate. But people familiar with the stocks market know it is not always the case. The price of stocks fluctuate everyday, and the gain you earned the previous day can be gone by the following day. From our example, let's assume that the new China branch did not attract a lot of customers and JFC did not meet its income target after six months. As a result, the stocks price dropped to P90, which is ten P10 lower than you bought the stocks. As a result you lose P10 from your investment. (P10 price decrease x 100 shares).
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| *The effect of taxes, commission ad other transaction costs were excluded to simplify |
Even if the price increased in two months, it can also be reversed due to price fluctuation. You may have heard of the term "paper income". This simply refers to your potential gains or losses if you decide to sell your investment at current market price. If you have sold your investment after two months when the price was at P110, you would have locked-in on your gain of P1,000.
Dividends - A lock-in of investment returns
That is mainly the reason why some investors are attracted to dividends. Dividends are payments made by the corporation to its investors using a portion of its income. In other words, it is the investor's share of profits from the company. It gives them a substantial return on their investment that is realized once the payment period takes place.
Dividends are normally paid in cash, but it can also be in a form of property, scrip, or even additional shares of stock. Although PSE does not require dividend issuance, most big companies such as JFC, SM, BDO and PLDT declare dividends on a regular basis. You can see sample dividend declarations here and here. For investors, it is a safe indicator that the company remains stable if it can pay-out dividends continuously. It also satisfies the investor's main goal of getting a return on their investment, and make them feel at ease of holding on the stocks even if there are fluctuations in price.
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