Q&A with CMMB Securites

Q. What’s the difference between an interest-paying investment and a dividend-paying investment?

Neela, Arouca

A: Interest is paid on savings, deposits or bond-type financial instruments and the rate paid can vary depending on the particular features of the financial instrument. You can think of an interest paying investment as one in which you lend money (by buying a bond for instance) and the issuer of that bond agrees to pay you a particular rate of interest. You can also invest your money in a time deposit with a bank. The bank would loan your money to another party and compensate you by paying you a rate of interest for the period of time you have your money with them. Rates vary widely depending on the type of instrument an investor buys. For example, a company may issue a fixed rate bond at 8 percent to be paid annually on the face value of a bond of $10,000 for five years. This means that the purchaser of the bond will receive $800 per year for five years and it should be noted that this interest payment is fixed.

Another interest rate instrument may have a floating rate. For example, a company may issue a floating rate bond that will pay the existing Treasury Bill rate plus 2 per cent annually on the face value of a bond of $10 000 for five years. This means that the 2 per cent payment or $200 interest payment would be fixed, but the total interest payment may vary depending on the existing Treasury Bill Rate. For instance, if the Treasury Bill rate is 4.45 per cent, an investor would receive 6.45 per cent or $645 annually. A dividend paying investment refers more to investment in shares of a company. A company that makes profits each year can choose to pay its shareholders a particular amount of profits and retain the rest for future investments in the company. The amount to be paid to shareholders out of the company’s profits is called dividends and the portion retained by the company is called retained earnings. For example, if you purchase a stock on the local stock exchange, that company’s Board of Directors will determine how much dividend is to be paid. If the company makes $1.00 of earnings for each share the company has in issue, and the Board of Directors declares a $0.50 dividend, then that company is said to have paid off 50 percent of its earnings in dividends.

Sometimes the company may set this dividend policy, or it may vary depending on the company’s need to retain its profits, thus the payment of dividend is not fixed unless you have preference shares. Companies can also pay dividends quarterly or semi-annually, which is also determined by the Board of Directors. Usually, companies may have a steady dividend policy so an investor can ascertain when a dividend payment is expected. When a dividend payment is declared by a company, an ex-dividend date and a payment date are stated. An ex-dividend date refers to a cut-off date where owners of the company’s shares are entitled to receive the dividend up to and on that ex-dividend date. The actual payment of the dividend may occur a few weeks or even a month after the ex-dividend date. So although an investor may sell his shares before a payment date, provided he sold his shares before the ex-dividend date, he will be entitled to receive that dividend.

Q. I turn 50 in a few months and have no retirement savings.
What can I do at this stage to have something when I retire in the next 10 - 15 years?

Rupert, Couva

A: You should consider starting a retirement plan as soon as possible. If there are no retirement plans available from the company you are employed with or if you are self-employed, you would need to look at long term savings offered by units trusts or insurance companies. You can invest in individual retirement products, such as annuities or retirement accounts offered by these institutions. Alternatively, you can look at purchasing a fixed income bond with a maturity of 10 years. When the bond matures in 10 years you can then place the money in an annuity plan. Important things to consider include the safety of your principal investment and whether the product offers a steady stream of income.

“All information contained in this article has been obtained from sources that CMMB believes to be accurate and reliable. All opinions and estimates constitute the author’s judgment as of the date of the article; however neither its accuracy and completeness nor the opinions based thereon are guaranteed. As such, no warranty, express or implied, as to the accuracy, timeliness or completeness of this article is given or made by CMMB in any form whatsoever. CMMB and/or its employees or directors may, where applicable, make markets and effect transactions, or have positions in securities or companies mentioned herein. Neither the information nor any opinion expressed, shall be construed to be, or constitute an offer or a solicitation to buy or sell.”

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