5 Trending Money Terms and What They Mean
By Joe Globensky, RFC®
Have you heard of FAANG, Zelle, and Negative Yield Bonds? To help educate our current and prospective clients, we want to define some words that have recently had an increase in internet searches. Below are five trending money terms, what they mean, and how they are used in today’s world.
Let’s start at a high level and talk about dividends. A company whose stock is traded publicly may pay an amount of money to its shareholders in the form of a dividend. Depending on the company, this dividend may be paid monthly, quarterly, semiannually, or annually. Companies may choose to pay a dividend if they have excess earnings that are not going to be reinvested back into the company or used for acquisitions. A company’s dividend yield is calculated by taking a company’s annualized dividend and dividing it by its current stock price.
So how do you know if a dividend yield is good or bad, high or low? One way is by comparing it to other companies in the same industry. If most of the companies in an industry have a dividend yield close to 2%, but the company you are researching pays a dividend yield of 6%, you may want to research why. And companies that pay a dividend are not automatically better than companies that don’t. The company that doesn’t may be using their excess earnings to invest in future growth.
Now that we understand dividend yield, let’s move on to dividend growth. If prices go up over time, you probably want your dividends to grow over time as well. A company’s dividend growth rate is the percentage change in the annual dividend paid out over time. For example, let’s assume at the start of year 1, a company pays $1 in dividends. By the end of year 5, the company is paying $2 in dividends. The company has increased its dividend by 100% over a 5-year period which equates to an annualized dividend growth rate of 14.87%.
Why is dividend growth important? If part of a company’s plan is to reward shareholders via dividend payments, consistent growth in those dividends makes it all the more valuable to shareowners. A popular investing strategy is to invest in Dividend Aristocrats. A Dividend Aristocrat is a stock that is included in the S&P 500 index that has increased its dividend payout for 25 consecutive years or more. While this investment strategy does not guarantee profits, it may be one way to evaluate the long-term reward of owning companies of this type.
You may have heard this next money term, FAANG stock, but do you know what it means? This term was first used back in 2013 in describing four prominent technology companies: Facebook, Amazon, Netflix, and Google (now known as Alphabet). In 2017, the second A was added for Apple. So, when someone is talking about the FAANG stocks, this is the group that they are referencing.
Why are these 5 stocks considered so important relative to all others? In addition to being widely known among consumers, they are also among the largest companies in the world, having a combined market capitalization of over $4.1 trillion as of January 2020.
Negative Yield Bonds
Negative yield bonds are bonds that cause their bondholders to lose money when they mature. This happens when holders of such bonds will end up with less money than they used to purchase the bonds. Where do I sign up, right? In 2019, the amount of negative yield bonds in the global market was $13 trillion. While we haven’t experienced this in the U.S., it is very prevalent in the low-interest rate, easy monetary policy European countries.
Why would someone buy a negative yield bond that may end up costing them more than they might receive at maturity? There are four primary reasons:
- The bondholder expects the value of the bond to keep rising. This requires an ever-growing number of investors committed to negative yield bonds.
- In times of economic or geopolitical turmoil, safe assets, even negative yield bonds, are capable of weathering the deterioration.
- Negative yields don’t mean negative income for some. Because US interest rates are higher than in other markets across the globe, an investor in negative yield bonds can hedge against foreign currency fluctuations and end up making money.
- An investor in negative yield bonds may be able to take advantage of the slope of the yield curve. This is the slope that tracks short-, medium-, and long-term interest rates.
Digital payments are growing by leaps and bounds as we become more connected in the digital world, and this is one of the newer money terms being searched. Zelle is a fast, safe, and easy way to send and receive money with friends, family, and others you trust. It was created in 2016 by some of the largest banks in the US. You may be familiar with a similar service from competitor Venmo.
Now, if you’re like me, initially you might think that digital payments aren’t for you. But now that I have used Zelle, it does make transmitting funds extremely easy. Owe someone for dinner or, in my case, a bottle of wine? All you need is their e-mail address or cell phone number to send money via Zelle. No writing of checks, no 5-day hold if you use different banks, and almost instant confirmation by both parties.
Hopefully you’ve found this brief definition of trending money terms helpful. At Connections Financial Advisors, we are your friendly financial guide and ally to help plan for your future. We want to empower you to meet your financial goals. And sometimes that’s through educational pieces such as this. If you would like to check out more of our informational blog posts, you can find our blog here.
The information provided here is for general information only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.
Past performance is no guarantee of future results.
The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.
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