Dear Violet, Mia, Noelle, Charlie, Henry and George,
Genesis 13:1-2 (ESV) – “So Abram went up from Egypt to the Negev, with his wife and everything he had, and Lot went with him. 2 Abram had become very wealthy in livestock and in silver and gold.”
Genesis 24:35 (ESV) – “The Lord has blessed my master (Abraham) abundantly, and he has become wealthy. He has given him sheep and cattle, silver and gold, male and female servants, and camels and donkeys.”
In Abraham’s day he owned sheep, goats, cattle, silver and gold. His animals were very valuable. If someone owned hundreds of animals they were very rich. The could use the animals for food, clothing and to help them with their work. They could sell some cattle or the wool from their sheep and use the money to buy something they need from someone else.
Today most of us don’t own sheep, cows, gold or servants. But we can buy companies that do provide milk, butter and cheese. Those companies make money. If you own a part of the company, you get some of the money the company earns. One way to own many companies is to buy something called an ETF.
What is an ETF? ETF is an acronym and it stands for Exchange Traded Fund. ETFs are investments you can buy or sell. The idea is to buy the investment for a sensible price and let it grow in value over time. Another benefit of many ETFs is that they pay a dividend. Good ETFs often hold ownership in 100 or more companies.
What is a DIVIDEND? A dividend is a payment you receive, much like interest, as an owner of the ETF. The companies that make up the ETF pay dividends, so those dividends are paid to you. You don’t have to do anything to receive the dividend. That is deposited directly into your UTMA account. In Abraham’s day his dividend was new baby sheep. He received new sheep by caring for the adult sheep.
The best way to understand this is to give you an example. One of the ETFs in your account is called “iShares Select Dividend ETF.” The short name, also called the ticker symbol for this ETF is “DVY.” Two of the companies you own include McDonald’s (burgers and fries) and Lockheed Martin Corporation (they make missiles, helicopters and satellites for space and systems for ships.) DVY has shares of each of these companies. There are a total of 100 companies in DVY. They include businesses like utilities (electricity and gas), banks, manufacturers who make products like Kleenex for stores like Target, insurance companies and restaurants.
What do you own? How many shares do you have?
When you buy an ETF, you buy shares. You can buy one share, ten shares or 100 shares. Each share costs about $91 as I write this, so if you bought 10 shares they would cost $910. As of April 2017, you each have a little more than eleven shares of DVY, so they are worth more than $1,000.
What is your dividend?
DVY pays a dividend once every three months. The dividend is about seventy cents, so you would get about $7.70 for eleven shares, or about $30.80 every year for eleven shares. In ten years you would be paid over $300 if the dividends kept coming and you did not sell you shares.
Love, Grandpa Winquist