Fun fact: 73.6% of all statistics are made up. My point is, don’t let the numbers and the math throw you. I’m providing some terminology and background for a better understanding of how the market works. Whether you manage your own account or use an advisor, knowing the game will make you a better player. Ask questions. Be curious.
We’ve covered the origins of the stock market and how stock is created. Market Cap, Earnings, P/E ratios explained some of the basic terms to measure a company. These are commonly found on your brokers website. The good ones will even provide official definitions.
Dividends are another biggie. In Finance 101 we learned that the primary goal of every company is to maximize shareholder wealth. If a company is losing money, their goal is to stop the bleeding and turn around. If the company is profitable, decisions are made as to how to spend that money. If they can invest in research or expansion to help the firm grow, they’ll crunch numbers to justify the decision and move forward. If they’ve grown all they can and the money is flowing in, they’ll give it to the owners in the form of a dividend.
Companies with a strong history of dividends are prized by investors. This is especially true when interest rates are low. Traditionally, retired investors relied on interest on their savings to provide a little extra income and kept their money safe in cd’s and government bonds. As low as today’s rates are, many retirees are choosing to buy dividend yielding stocks. If this is you, please remember there’s market risk that should not be ignored. It can be minimized by diversification but it’s still there.
Dividend history is a quick look at the health of a company. If they pay the same dividend consistently, that’s a sign of strength. If they regularly increase the dividend, they’re growing and doing something right. Conversely, a decreased dividend can be a red flag for obvious reasons.
Dividend yield is the return on your investment. The yield depends on the price paid for the stock and the dividend paid. Today’s websites calculate it for you so don’t worry about the math.
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