Making Sense (and Cents) of the Stock Market

Disclaimer: There are risks when investing. None of this is intended as financial advice, but is rather written from my own experience. As always, use discretion when investing.

One of the things that drives me crazy today is how very little some people seem to know about investing. Maybe it’s just the younger generation, after being raised in the Tech Boom, but most folks’ investing knowledge doesn’t seem to be much more than “buy low – sell high.” How ridiculous is that, though? Do people ever stop to think about what kind of gamble they’re making with that strategy? I know folks who just throw away money to the wind, because they make uninformed choices based on that strategy and their own feelings as to whether the company they are choosing to invest in is good or bad. This, my friends, is not an ideal investing strategy.

So in order to understand a better strategy, we have to first understand why we are buying stocks in the first place.

Why would a company offer stock?

Ever ask yourself this question? Why would a company be willing to sell part of itself off to random strangers? The answer is almost always for “liquidity.” Selling stock allows a company to divide an imaginary set amount of itself off, speculate as to its value, and then give out these imaginary pieces of the company for real dollars in an Initial Public Offering or IPO. Flush with cash, these businesses can do things like buy new factories or stores or what have you. With the first strategy (buy low, sell high), the investors are hoping the valuation of the company will go up, which will depend entirely on whether or not the company heads continue to make profits, which could depend on whether they spend all their new IPO money on company assets or on new yachts.

Of course, new shareholders get some rights. They get to do things like vote periodically about company leadership and such. However, did you know that some companies come with added benefits, and that these companies are getting rarer and rarer? (This is, I feel, a reflection on this buy-low-sell-high mentality).

What am I talking about? I’m talking about DIVIDENDS!

Dividends are an investor’s best friend. What’s a dividend? A dividend is a periodic payout from the company you own directly in to your bank account. These occur, depending on the company you invest in, monthly, quarterly, or annually. As I think you can gather, I really prefer the monthly dividend, but do go for quarterly dividends as well.

Did you know that when the NYSE first opened, a majority of companies offered dividend payouts? These days, the companies that offer dividends have slipped into a minority, and that’s unfortunate and, I believe, shows an inherent lack of strength in the market.

Now, a dividend may not look like much on paper, but they add up fast! Say each share of the company earns you a 10 cent dividend on a monthly basis. Now say you own 100 shares. That’s 10 dollars a month. Over the course of a year, you’ve now earned 120 dollars. If the stock goes up, congratulations! That’s a bonus. You can choose to sell at this point, and everything you’ve made will have been a profit. Of course, you’ll lose the dividend if you sell, but obviously that choice is up to you.

Now obviously, most investors own more than 100 shares of a company. Ratchet that up to 1000 shares, and you’re making 100 dollars a month, or 1200 dollars a year. Suddenly, you’ve cut a cost out of your life – that cell phone you have is now paid for, or the dividends cover the gasoline in your car, freeing up your money elsewhere.  I have one stock that pays me roughly 12- 14 percent annually on my investment. What could you do with an extra 12 -14 percent (especially in an economy like this)?

I take it you see the potential.

This is a strategy I very much like and use when investing, because it offers something tangible to me in return for my money. If I were to just invest with a buy-low-sell-high strategy, my money is taken away from me and I’m not guaranteed to make any sort of cash since the stock isn’t guaranteed to go up. I’m just gambling. In fact, there is an opportunity cost inherent in this strategy because you have to take the money out of a bank account, where it was earning interest (albeit not much), and put it into the market where nothing is guaranteed. With dividends, you typically earn more than what interest pays and then some.

Alright, so you want to get started investing. How do you find stocks that give out dividends?

Do your research. Look in the paper (Saturday editions of the Wall Street Journal include a YLD at the end of the quotes). Look online. You can pay for financial letters, but http://www.dividenddetective.com/ is a good place to start.

What do I want in a Dividend Stock?

Let's talk about some things to look for when picking a Dividend Stock.

7 – 12 %:

Many stocks pay around 4 percent. I feel that’s too low for me, personally. I shoot for 7 to 12 percent. Higher dividends can indicate a risky investment. Assess the risk when buying.

Profitable:

Basic investing question: how will the company pay you if they aren’t getting paid? Establish that the company is profitable before investing.

Make Sure the Company is not in Big Debt:

Some debt is tolerable. Huge debt is not. Debt will kill dividends.

Price History:

Look at the price history of the company. Has the stock been relatively stable for the past 5 – 10 years? How long has the company been around for? All of these are indications of the strength of the company.

Wrapping Up - More to Come

Okay – that’s all I’m on about for now. I hope this helps you start to evaluate your investment options more thoroughly and put you on a path to investment success. Next time, we’ll talk about Dividends from Tax-Advantage Entities (Coming Soon!).

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-Artifex