Money Math For Teens - Save And Invest

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Money Math for TeensDividend-Paying Stocks

This Money Math for Teens lesson is part of a series created by Generation Money, a multimedia financial literacy initiativeof the FINRA Investor Education Foundation, Channel One News and America Saves.Special thanks to Rudy Gawron for preparing the lesson and to Jill Sulam of Transformations Editing LLC for editorial guidance.Money Math for Teens. Copyright 2014 by the FINRA Investor Education Foundation or FINRA Foundation. Reproduction fornonprofit, educational purposes is permitted and encouraged. All rights reserved.

Dividend-Paying StocksLesson PlanOBJECTIVEIntroduce students to fundamental concepts of investing in dividendpaying stocks as an alternative to low-yield savings accounts and moneymarket accounts.Students will:00Understand the vocabulary associated with dividend-paying stocks00Calculate yield on a stock purchase at any particular value00Analyze different options for building a portfolio of dividend-payingstocks00Calculate return on investment, taking into account price swingsand dividend payouts.TEACHING MATERIALS00Lesson plan00Dividend-Paying Stocks student handout00Student assessment worksheet with solutionsLESSON ACTIVITY1. Determine students’ prior knowledge of fundamental vocabularyand concepts. Suggested questions: How many of you have a savings account? Do you know the interest rate on the account? How have interest rates changed in the last 10 years? How do rates change, who changes them and why do theychange? What economic environments cause rates to rise and fall? Have you heard of a dividend? If so, what is it?2. Introduce the student handout. Ask students to read pages 5 and 6, up to the Stocks section. Ask the class to answer the questions on page 6: What do you do with your extra money? If you spend it, what do you buy? If you save it, how do you do it? Would you still put it in a bank savings account?Why or why not? Would you be open to a different savings method? Are there alternatives available that would bring youa 4% to 6% return?1Introduction

Dividend-Paying Stocks3. Stocks and dividends (page 7 of handout): A share of stock is ownership in a corporation. Stocks trade on stock markets. Stock prices fluctuate, meaning they go up and down. Dividends are sums of money paid by a corporation to shareholders. Yield: dividend earnings expressed as a percentage of an investment.Introduce the formula for calculating yield:Yield DividendCurrent Stock Price 1.6025 0.064 6.4%Solutions to yield problems (page 10 of handout):Stock PriceDividendYield 20.00 0.800.04 4% 40.00 1.200.03 3% 58.50 2.100.0359 3.6% 82.00 1.550.0189 1.9%Ask students: What effect on a stock’s price would you expect after a companyannounces it is raising its dividend? It would make the stock more attractive and therefore tend togive the stock price a boost. Do you think a company raising its dividend is always a signal ofthe company’s strength? Could a struggling company raise its dividend to get its stock priceto rise? What is stock price appreciation?4. Comprehension check (page 9 of student handout):You invested 1,000 in a dividend-paying stock that cost 20 pershare and paid 0.80 per year in a dividend. Exactly one year later yousold that same stock at 23 per share. What would be your return oninvestment? How many shares of stock did you purchase?1000/20 50 shares What was the dividend yield expected at the time of purchase?0.80/20 0.04 4% How much money did you collect in dividends?0.80 x 50 402Introduction

Dividend-Paying Stocks When you sold, did you make a profit? How much?Yes.23 – 20 33 x 50 150 What was your profit yield?150/1000 0.15 15% How much money did you collect in excess of your initial 1,000 investment?150 40 190 What is the total yield return on your one-year investment?190/ 1000 0.19 19%Let’s say you made your buy and sell transactions through an onlinebrokerage account. You would have paid 10 to buy and another 10to sell the shares. Your total investment cost would have been 1,020. What would the commission have done to your eventual yield?The yield would be slightly lower.190/1020 18.6%5. Risk vs. reward (pages 10–11 of handout): Ways to determine if a company with a nice dividend is solid and notan overly risky investment: Solid, mature, well-established companies raise dividendsconsistently. Dividend aristocrats and achievers Consistent dividends will compound over time.6. Depreciating stock price: A rising dividend increases the yield on an existing investment. Thesame can happen if a stock’s price drops (pages 12–13 of handout): A 50 stock with a 2 dividend yields 4%. A drop in price to 45raises yield (if you buy at 45) to 4.44%. Purchasing more stock at the lower price lowers the average priceof an overall holding: Purchasing a 45 share after a 50 share averages the yield to4.21% for both investments combined. Average price paid for the shares drops to 47.50/share. Planning for a possible price drop might be a strategy for improvingan investment after the initial purchase.3Introduction

Dividend-Paying Stocks7. Strategy for earning a desired 10% return on investment(pages 12–13 of handout): Let’s say you’ve invested in a 50 stock paying a 2 dividend,and you want an overall 10% return. This investment has a 4% annual yield, or 1% per quarter. Holding the investment for 10 quarters (2.5 years) will resultin a 10% return from dividends. A rise in stock price to 55 per share is a 10% return on priceappreciation, assuming the investment was held for a short termand no dividends had yet been received. After one year of receiving dividends, a 4% return has been realized.It would take a 3 rise in stock price to 53 to achieve a 6% increaseand complete the 10% desired return.8. Sample stock quote from IBM (via Yahoo Finance): Illustrates pertinent information about currently trading sharesof stock. In particular, the 52-week stock price range, dividend andyield information are highlighted for students.9. Evaluate students’ comprehension (see assessment worksheet).4Introduction

Dividend-Paying StocksStudent Handout: Dividend-Paying StocksHave you ever been surprised by your own success? You studied hard for a testbut weren’t confident about how well you did. When the results came in, yougot a perfect score! You shouldn’t have be too shocked, because hard work andperseverance often produce success.What would you do if you found yourself successful with money? You have ajob, you’re good at it and you periodically get raises. After paying your expenses,you have money left over. Or maybe you start a small business mowing lawnsin the neighborhood. You charge a good price and do an excellent job, and wordspreads. The next thing you know, you are cutting more lawns and earningmore money than you had expected.If you are responsible enough to successfully create extra income, chancesare you aren’t about to waste it. You may treat yourself from time to time,rewarding yourself for your hard work. But what do you do with your extramoney? Save for a car? Upcoming college expenses?You’ve learned about the power of compound interest and how saving moneysteadily and leaving it to grow will reward you with even more money. Butthings aren’t necessarily that simple. The path to saving extra money used tobe clear: put money in the bank and let it earn interest. These days, averageinterest rates on savings accounts are as close to zero as you can get, and theymay not rise anytime soon. Although interest rates paid on savings accountsvary by bank, generally the current rates on savings accounts vary from as littleas 0.04% to 0.20%. If you deposit 1,000 into a savings account paying 0.04%annually, after one year you will earn:1000 x 0.0004 0.40At 0.20%:1000 x 0.0020 2.00Hardly worth parking your 1,000 there, right? Of course, the Federal DepositInsurance Corporation (FDIC) protects deposits in US commercial banks up to 250,000. Money in a bank account is safe, and putting it in a savings accountis a good way to protect it, but don’t expect it to produce meaningful growth.Currently, the interest rates banks are offering for savings accounts are lowbecause the economy has been sputtering for several years now. The FederalReserve Bank (the government agency responsible for watching over oureconomy) has been lowering interest rates steadily for years in response tosluggish economic numbers. The idea is to keep interest rates on borrowinglow in order to encourage people and businesses to borrow money and thusinvigorate economic activity. Because banks have to loan money at low rates,they have to lower the rates they pay on deposits to fund those loans. So, asborrowing interest rates drop, so do savings interest rates. This is bad news forsavers.5Student Handout: Dividend-Paying Stocks

Dividend-Paying StocksHere is a chart showing the average interest rate on certificates of depositdating back almost 30 years. You’ll notice that rates haven’t been this badfor savers in all that time.CD rates history 1984-2012By Denise Mazzucco Bankrate.comThis chart shows trends of the national average CD rates on 6-month CD yields,1-year CD yields and 5-year CD yields since 1984, according to Bankrate’sweekly survey on interest rates.So:600What do you do with your extra money?00Would you still put it in a bank savings account? Why or why not?00Are there alternatives available that would bring you a 4% to 6% return?Student Handout: Dividend-Paying Stocks

Dividend-Paying StocksStocksYou’ve heard of the stock market, but what exactly are stocks? A share of stockin a corporation is a share of ownership. When you buy a share of stock, you arebuying an ownership position in that company. If the company does well, thestock price rises. If you then sell that share at a higher price, you make money.If the stock price falls and you sell it at a lower price than what you paid, youlose money.Investing money in stocks brings with it an element of risk. If the stock pricefalls, you can lose money—that’s a risk. Stock prices fluctuate every second ofevery minute of every day that the stock market is open. But you don’t need toconcern yourself with these constant fluctuations. The current price of a stockdoesn’t affect your investment until you are ready to sell it. You purchased thestock at a certain price, and your investment is fixed at that price. If the stockhas risen in price since you bought it, then selling it will bring you a profit. Ifyou buy shares, hold onto them and aren’t selling the stock today, then thecurrent price doesn’t really matter. A good reason to purchase shares of stockand hold them for long periods of time is known as dividends.What Are Dividends?Some corporations pay dividends to their shareholders. A dividend is a sumof money paid regularly (typically quarterly) by a company to its shareholdersout of its profits (or reserves).Companies sometimes reward their shareholders by paying them a portionof their profits. If you purchase shares of a company that pays dividends andyou hold on to those shares for a prolonged period of time, you will get paid.Typically every quarter, a company will pay ¼ of its annual dividend amount.For example, if a company pays a 2 annual dividend per share of stock, thenyou will receive 0.50 per share you own each quarter. Regardless of the dailystock price, you will continue to receive dividends each quarter, as long as youown the stock and as long as the company continues to pay that dividend.YieldYield is the ratio of the dividend amount to the current stock price. You cancalculate the yield you will receive from holding a stock and accumulating thedividends before you buy it. Just divide the annual dividend amount by thecurrent stock price:Yield 7DividendCurrent Stock PriceStudent Handout: Dividend-Paying Stocks

Dividend-Paying StocksExample Metro Corporation is currently selling stock at 25 per share. The companypays a 1.60 dividend per year.Yield 1.6025 0.064 6.4%That’s right—you’ll earn a 6.4% yield on your 25 investment!Calculate the yield you would get if you purchased these shares of dividendpaying stock at these prices:Stock PriceDividend 20.00 0.80 40.00 1.20 58.50 2.10 82.00 1.55YieldBenefits of Dividend-Paying StocksIn recent years, dividend-paying stocks have become a popular investment forinvestors focused on income-producing investments. This is because traditionalfixed-income investments like bank accounts and certificates of deposit areyielding next to nothing. Over time, stocks that pay a high dividend tend tooutperform stocks that do not. From 1972 through September 2010, US-baseddividend-paying stocks returned an average of 7.1% increase in price annually.Compared to the 1.5% average annual increase of non-dividend paying stocks,dividends are clearly an attractive choice.Dividend-paying stocks have historically outperformed the overall stockmarket during periods when stock prices are weak. Investors gravitate towarddividend-paying companies during times of economic trouble. Companies thatpay dividends are generally more conservative and have stronger cash flows,which allow them to pay their investors dividends in the first place. By payingdividends, companies indicate the strength of their business by showing thatthey are comfortable paying shareholders instead of saving their earnings fortough times.Investing in dividend-paying stocks offers two possible ways to earn money:price appreciation of the stock itself and the dividends received by holding thestock long term.8Student Handout: Dividend-Paying Stocks

Dividend-Paying StocksComprehension CheckRemember the 1,000 we talked about putting in a bank savings account?It earned as little as 0.04% interest, or just 40 , after a year. Let’s look at whatwould happen if instead you invested that 1,000 in a dividend-paying stockthat cost 20 per share and paid 0.80 per year in a dividend. Exactly one yearlater you sold that same stock at 23 per share.What would be your return on investment?00How many shares of stock did you purchase?00What was the dividend yield you expected at the time of purchase?00How much money did you collect in dividends?00When you sold, did you make a profit? If so, how much?00What was your profit yield?00How much money did you collect in excess of your initial 1,000investment?00What is the total yield return on your one-year investment?Typically, if you have an online brokerage account, you can buy or sell stocksfor a flat fee called a commission. It’s common for that fee to be 10 per trade,buy or sell, regardless of the number of shares and the dollar amount of thetransaction. Some companies will allow you to purchase shares through theirweb sites commission free, but not all will allow you to sell shares commissionfree.Let’s say you made your buy and sell transactions through an online brokerageaccount. You would have paid 10 to buy and another 10 to sell the shares.Your total investment cost would have been 1,020.900What would the commission have done to your eventual yield?00Would you still make the investment?Student Handout: Dividend-Paying Stocks

Dividend-Paying StocksRisk vs. RewardBefore you run out and research companies with the highest-yield dividends,let’s talk a bit more about risk.In some cases, a high-yield dividend can be a warning sign. Not every companywith a high dividend has strong fundamentals supporting that dividend, suchas good earnings. A high dividend can be an attempt to lure investors intobuying the stock of a company in trouble, one that cannot continue to paythat dividend in the future. It also can be an attempt to attract attention to astock and raise its price, but the price of the stock may be depressed for somefundamental reason.Research is important in determining if a company offering a nice dividend isactually risky. Here are tips to keep in mind.00Solid, mature, well-established companies raise dividends consistently.Good companies that reward their shareholders have reputations toprotect. Paying consistent dividends to shareholders builds investors’trust, and that’s a reputation most good companies would not risk.00Consistent dividends will compound over time. If you reinvest thedividends you earn into buying more shares, you will consistently earnstill more dividends.00Some companies have been paying dividends and raising them everyyear for decades. This is a streak many companies wouldn’t want tobreak.00A dividend aristocrat is a Standard & Poor’s 500 Index (S&P 500)company that has raised its dividend every year for the past 25 years.A dividend achiever has raised its dividend every year for the past10 years. The S&P 500 is an index of 500 stocks chosen for market size,liquidity and industry grouping, among other factors. The S&P 500is designed to be a leading indicator of U.S. equities and is meantto reflect the risk/return characteristics of the large cap universe(companies with a market value of 5 billion or more). Companies included in the index are selected by the S&P IndexCommittee, a team of analysts and economists at Standard & Poor’s.The S&P 500 is a market value weighted index—each stock’s weightis proportionate to its market value.Source of this definition: dent Handout: Dividend-Paying Stocks

Dividend-Paying StocksIf your dividends rise each year, so will your yield. For example, if you were tobuy a 50 stock with a 2 annual dividend, your yield would be 4%. If a coupleof years later the dividend has risen to 3 per year, your yield would be 6%!Remember, your yield is fixed when you buy the stock unless the dividend itselfchanges. The stock price might have doubled to 100 per share, but becauseyou bought it at 50, your yield is 6%.Earlier we mentioned that money held in a bank savings account is protectedby the FDIC from loss (up to 250,000). Saving your money in a savings accountinvolves no risk but returns a low reward when interest rates are low. As we’veseen, investing in dividend-paying stocks can yield higher returns. The rewardcan come from holding the stock long term, collecting the dividends andwaiting for the stock’s price to appreciate. But there is risk involved in buyingstocks, primarily from price depreciation—that is, the stock price can go down.However, there may be a silver lining even if the stock’s price drops. Let’s sayyou purchase a share of stock at 50 and it pays a 2 dividend. Your yield willbe 4%. If the price of that stock depreciates to 45 per share, then you’ve lost10% of the value. But you haven’t actually lost anything unless you sell thestock at 45.What would the new yield be on this stock at 45 per share?Yield DividendCurrent Stock Price 245 0.0444 4.44%That’s right: the yield increased. Buying the stock at this price point is actuallya better deal than it was at 50.If you purchased another share at 45, what would your average yield be?The price you paid for both shares 50 45 95The dividend you will receive from both shares 2 2 4Yield DividendCurrent Stock Price 495 0.0421 4.21%What is the average price you paid for your stocks?50 452 47.50The average price you paid for your stocks dropped to 47.50, and the averageyield increased from 4% to 4.21%. Was that price drop really a bad thing?Are you starting to see the beginnings of a stock-purchasing strategy here?11Student Handout: Dividend-Paying Stocks

Dividend-Paying StocksStrategies for SuccessLet’s not forget that you are already successful. You have extra money and want tomake it work for you. Purchasing a 50 stock with a 2 dividend for the long term,not concerning yourself with daily price swings, will earn you a consistent 4% yield.This certainly beats the bank savings account alternative by a wide margin.Should the stock price fall from your 50 entry point, you could use that fall inprice as an opportunity to improve upon your investment. Instead of investingall of your money at 50, you could invest some of your money at that price,lock in the 4% return for the long term and wait. If the stock price falls below 50, you would have cash to reenter the stock at the lower price, reducing youraverage price per share and improving your average yield. Overall, you wouldmake your investment even better.If the stock price hovers around 50 and you are comfortable doing so, you canthen commit the money you held back to increase the number of shares youhold at 50, and lock in the 4% return on all of your money.But what if the stock price rises? If your yield gets better when the stock pricefalls, then it should get worse if the stock price rises. But don’t forget aboutstock price appreciation making you profit. When a stock price rises above youraverage purchase price, you have made money, even though you don’t actuallycollect those profits unless you sell the stock.Let’s go back to the very beginning. You have money to invest and you arelooking to make it grow. You decide you’d like to make a 10% return on yourmoney. You’ve found a 50 per share dividend aristocrat or dividend achieverthat pays a 2 dividend per year.00How long do you need to hold the stock to achieve your desired 10%return by only collecting dividends?By locking in a 4% annual return, you’ll receive 1% per quarterin dividends. It will take 10 quarters, 30 months or 2.5 years tocomplete a 10% return. You will achieve your goal based only ondividends and time.00What would your return be if the stock price rose to 55 per share30 days after you bought it?A stock price rise to 55 per share is a 10% increase. If you soldthe stock at that price, you would achieve a 10% return targetquickly by only using stock price appreciation.12Student Handout: Dividend-Paying Stocks

Dividend-Paying StocksThen there’s the blended approach. You can achieve a 10% return in less than30 months if you are lucky enough to get some price appreciation along withdividends.00If you held your stock for exactly one year, what would the stock pricehave to be on that day in order for you to sell the stock and achieveyour 10% return?Since you held the stock for one year, you have received 4% alreadyby collecting the dividends. To achieve the desired 10% return,you’d need a 6% increase in the stock price.1% of 50 0.506% of 50 6 x 0.50 350 3 53The stock price would have to be 53 for you to make the 6% returnyou want.Using a blended approach, you collected 4% in dividends and madeanother 6% on stock price appreciation and thus achieved your desired10% return in one year or four quarters.Each of these three methods will work, and no method is better than theothers. It all comes down to your patience and tolerance of risk.Getting StartedYou can start learning about stocks and dividends by getting a current stock quote.This stock quote for IBM (below) was taken from Yahoo.com’s Financial tab.To find quotes for stocks you’re interested in, go to finance.yahoo.com, typethe symbol for a particular stock in the box at the top left, and click Look Up.If you don’t know the company’s stock symbol, type the company’s name inthe quote look-up box and a list of companies, with their symbols, appears.13Student Handout: Dividend-Paying Stocks

Dividend-Paying StocksStock quotes provide a lot of information. We’ve circled two important piecesin the quote below:BA00Point A: Shows the current annual dividend the stock is paying, as wellas the yield at this stock price.00Point B: Shows the 52-week range of the stock’s price. When trying todetermine if the current price of a stock is too high, too low or in themiddle, it can be useful to know its price range. IBM is trading at about 193 per share, about 21 points above its low point for the year and19 points below its high point.If investing in dividend-paying stocks seems like a reasonable alternative to abank savings account and you accept the risk involved with investing in stocks,then it is possible for you to achieve nice growth. Keeping an eye on yourinvestments will help you enjoy long-term success.14Student Handout: Dividend-Paying Stocks

NameDateAssessment: Dividend-Paying Stocks1. Metro Corp. is currently selling stock at 32.50 per share with a 0.90 dividend. If you purchase100 shares at the current price, what yield will you expect as a return on your investment?2. Metro Corp. is currently selling stock at 32.50 per share with a 0.90 dividend. You invest 1,625 with no brokerage commissions and hold the stock for one year. How much income willyou earn?3. After the year is up, Metro Corp. is selling stock at 28 per share. You purchase the same numberof shares again at the new price. What is the blended (average) yield you are now earning?4. Metro Corp. is doing well and announces an increase in its dividend to 1.02 per share. The stockprice shoots up to 34.25. What is your new annual yield?5. How long would you need to hold a 14 stock paying a 0.56 annual dividend to achieve a 10%return?15Assessment: Dividend-Paying Stocks

NameDateThe following table shows the life cycle of a single stock investment. Use this data to answerquestions 6– 10.Date of TransactionTransaction ExecutedDividend on This Date01/01/2011Purchase 50 shares at 17.50/share 0.3007/08/2011Purchase 75 shares at 15.00/share 0.3004/01/2012Purchase 75 shares at 22.50/share 0.3506/29/2012Sell entire holding at 24.10/share6. What dividend dollar amount was earned in 2011?7. What dividend yield was earned in 2011?8. What dividend dollar amount was earned over the life of the investment?9. What was the dividend yield of this stock on April 1, 2012?10. What was this investment’s total return?16Assessment: Dividend-Paying Stocks

Dividend-Paying StocksAssessment Solutions: Dividend-Paying Stocks1. Metro Corp. is currently selling stock at 32.50 per share with a 0.90 dividend. If you purchase100 shares at the current price, what yield will you expect as a return on your investment?0.90/32.50 0.0276 2.8%2. Metro Corp. is currently selling stock at 32.50 per share with a 0.90 dividend. You invest 1,625 with no brokerage commissions and hold the stock for one year. How much incomewill you earn?1625/32.50 50 shares50 x 0.90 453. After the year is up, Metro Corp. is selling stock at 28 per share. You purchase the same numberof shares again at the new price. What is the blended (average) yield you are now earning?50 shares x 28 14001400 1625 30250.90 x 100 9090/3025 0.0297 3%4. Metro Corp. is doing well and announces an increase in its dividend to 1.02 per share.The stock price shoots up to 34.25. What is your new annual yield?1.02 x 100 shares 102102/3025 0.0337 3.4%5. How long would you need to hold a 14 stock paying a 0.56 annual dividend to achievea 10% return?0.56/14 0.04 4% annual return, so 2 years 8% and 2.5 years 10%or0.1 x 14 1.401.4/0.56 2.5 years 10 quarters17Assessment Solutions: Dividend-Paying Stocks

Dividend-Paying StocksThe following table shows the life cycle of a single stock investment. Use this data to answerquestions 6–10.Date of TransactionTransaction ExecutedDividend on This Date01/01/2011Purchase 50 shares at 17.50/share 0.3007/08/2011Purchase 75 shares at 15.00/share 0.3004/01/2012Purchase 75 shares at 22.50/share 0.3506/29/2012Sell entire holding at 24.10/share6. What dividend dollar amount was earned in 2011?0.30 x 50 15(0.30 x 75)/2 22.50/2 11.25(July purchase received half-year dividend [2 quarters])15 11.25 26.257. What dividend yield was earned in 2011?Investment:50 x 17.50 87575 x 15 1,125Dividends:0.30 x 50 15(0.30 x 75)/2 22.50/2 11.25(July purchase received half-year dividend [2 quarters])Yield:Yield (15 11.25)(875 1125) 26.252000 0.0131 1.3%8. What dividend dollar amount was earned over the life of the investment?2011: 26.252012: 1 quarter earned on 125 shares @ 0.30: (0.30 x 125)/4 37.50/4 9.381 quarter earned on 200 shares @ 0.35: (0.35 x 200)/4 70/4 17.502012 total: 9.38 17.50 26.88Life of the investment: 26.25 26.88 53.1318Assessment Solutions: Dividend-Paying Stocks

Dividend-Paying Stocks9. What was the dividend yield of this stock on April 1, 2012?Yield 0.3522.50 0.0155 1.6%10. What was this investment’s total return?Investment:50 x 17.50 87575 x 15 1,12575 x 22.50 1,687.50875 1125 1687.50 3,687.50 investedSale:200 x 24.10 4,820Earnings:4820 - 3687.50 1,132.50 price appreciation1132.50 53.13 1,185.63 price appreciation dividends collected1185.63/3687.50 0.3215 32.2% total return19Assessment Solutions: Dividend-Paying Stocks