A new investor class has emerged. Trading has spread from Wall Street to Main street. Some of the most popular shows on cable television relate to stock trading. Along with the masses entering the market come myriad trading styles. Some look for quick hits. Others look for great income from high paying dividend stocks.
Some stocks have small earnings but an expensive price to earnings ratio. Those buying them expect substantial growth and are willing to pay up for it. Many of these traders are seeking quick returns in the form of stock price appreciation. 10% a year is not satisfactory for them, they are looking for 10% in a few days.
The price to earnings ratio (PE) is a simple calculation. One simply takes the share price and divides it by the expected earnings per share. This resulting number is the price to earnings ratio. Many say that a PE should approximate the company's growth rate. For example, if earnings were projected to grow from $1.00 to $1.25 that represents 25% growth rate and should trade at a corresponding PE. However, the market obviously doesn't always follow anyone's rules.
Whereas quick profits can be made with high PE stocks, the converse is also true. When a high PE stock, or a growth stock, disappoints in earnings the results can be dramatic. Once the PE ratio contracts it results in a quickly dropping stock price. Those seeking quick hits are termed "hot money". When hot money exits it does so en masse. This is not a good thing for those left holding shares.
Others seek refuge in stocks with more reasonable PE's and paying good dividends. They seek to profit from the income stream provided by the dividend payments as opposed to quick profit on a jump in underlying stock price. This is a more patient investor who does not wish to expose themselves to the risks associated with high PE stocks.
Owners of stocks with a good dividend do not need the stock to go up at all to profit. Obviously, this is desirable as well, but even if the stock stands still the steady flow of dividends present attractive return, especially if the yield is over 5%. Yield is calculated by dividing the annual dividend amount into the current stock price.
Some stocks have extraordinarily high yields, sometimes over 10%. One should be wary of exceptionally high yielding dividend stocks. There is often a reason behind the anomaly, most often being the smart money thinks there will be a dividend cut. When dividends are cut this reduces yield thus drastically changing the calculations.
Just as there is a lid for every pot, there is a stock for every individual. Supercharged individuals can seek supercharged stocks. Those seeking dependable returns without a lot of risk can choose from a large universe of high dividend paying stocks.
