I Was Wrong About ARCC - Understanding Dividend Payouts
Hi, my name is Richard. Welcome to my investment journey! This is a weekly update but also clarification about something that I shared incorrectly. I had a fundamental misunderstanding about how dividends payout that I'd imagine to be a fairly common one for new investors. Here, I explain and correct my issue.
I initially thought that the dividend rate is paid out each time, but that's not the case. The dividend rate is the cumulative amount paid out.
For example, a stock with a 12% dividend payout that pays monthly does not pay 12% each month, but instead pays 1% each month, adding to 12% by the end of the year. That said, if your dividends reinvest, this compounds very quickly. Instead of multiplying your portfolio by 1.12, it would instead be multiplied by 1.01^12, or 1.127. That's over half a month of extra pay!
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