Buying For Income vs. Buying For Capital

by David Jenyns on October 23, 2009

Buying stocks for income is relatively easy. The indicated stock dividend divided by the current price will give the yield in percentage terms. The average yield of 10 big oils in the first quarter of 1959 was three percent. For five chemicals it was 2.24 percent. For seven steels it was 3.85 percent.

Take, for instance, a stock selling at 50 and paying $2. Since a 50-percent payout is the general practice, a dividend rise to $3 is indicated. Naturally, there will be a small rush toward the stock and a rise in the market price, probably to 75, or the new equivalent of four percent.

If the objective is capital gain, timing becomes more crucial. Somehow you must determine how many more points above the current price your stock is likely to go, and whether this will be a satisfactory profit, considering that possibly 25 percent of it will go for taxes.

If stock prices reacted exclusively on good or bad dividend news or expectations, the market would be far more static than it is. It’s rare that a jump in earnings can be positively pin-pointed, or pin-pointed before a market rise has taken effect.

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