Buying stocks for income is relatively easy. The indicated dividend divided by the current price will give the yield in percentage terms. If the yield suits you, and investigation suggests that it is likely to be maintained, the price is right, whether it is in the high, middle, or low range for the year.
The problem of the buyer-for-income in recent years, of course, has been the fact that a rising market has reduced yields to some very uninspiring levels. 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. Only the better railroads were around five percent, as a group.
Strictly on an income basis, the investor would do better at the savings bank than in oils and chemicals, and might be considered to have missed his market in these categories. The choice then is whether to argue himself into accepting three or 3.5 percent (or 2.2 if he wants G.E., 1.5 if he wants Dow) in a sought-after category, whether to switch categories, or whether to ignore the market until conditions are more to his liking. There may also be a temptation to jump into a stock that for some reason is still yielding five or six percent, although it would be foolish to do so without determining why it has maintained a high price/dividend relationship when everything else is low.
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.
All rises must be predicated on earnings, or the expectation of earnings. Take, for instance, a stock selling at 50 and paying $2. This is a four percent yield, which, we'll say, is about average for this market this year. Now, news gets out that it is possible that the company will earn $6 per share by year's end. 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.
This is the simplest sort of cause-and-effect relationship, so simple, in fact, that it practically never happens just this way. If prices reacted exclusively on good or bad dividend news or expectations, the market would be far more static than it is. Still, earnings and the benefits there from that shower down on the stockholder are the basic premise of stock activity.
The biggest complicating factor is the general absence of hard information. It's rare that a jump in earnings can be positively pin-pointed, or pin-pointed before a market rise has taken effect. As a result, most investors have to contend with a vast range of other investors' hopes, guesses, anticipations, and facts. Furthermore, the stocks believed to have the greatest potential for growth usually vary the general pattern. The Dows, Minneapolis Honeywells, Owens-Cornings, and Minnesota Minings have long since been pushed to levels where their dividend returns are virtually meaningless, and where perhaps even their growth potential has been completely discounted. Still, these extremities were more marked when stocks generally were yielding five and six percent. Now that so many yield three and under, the growth specials do not seem so unreasonable at less than two.