A fan of LCF on Personal Finance dropped me a message on Facebook last week. Here is his question:

Care to explain about the difference between the annual, double dividend payment (i.e. twice per year) vs. annual, single dividend payment?

I’m still blurred, because the amount gained from the double option (e.g. 2.5% and 3.2%) is lesser than the amount gained from the single option (e.g. 5.7%). Or, is it?!

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When it comes to interest rate in financial mathematics, it is assumed that, without any mention of its compounding period ( for instance, semi annually or quarterly), it automatically refers to the annualized interest rate.

So, you have 2 cases here.

Case 1

You invest $ 1,000, and you have 5.7 percent dividend yield per annum.

Your dividend payout = $ 57

Simple and straightforward.

Case 2

You invest $ 1,000, and you have 2.5 percent dividend yield per annum during the first 6 months, and then another 3.2 percent per annum for the second half of the year. These are the effective annual rates of return if you hold onto your positions for one full year.

Using this online finance calculator, we convert the effective annual rates into their nominal interest rates.