Buying Stock By Dividend

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You want to buy stock, but how much should you buy? As a general rule, the dividend and yield will be positive if the stock is soundly priced as compared to the prevailing market.

At the end of 1957, a composite of all 992 dividend-paying stocks on the New York Stock Exchange had a market price of $42.02 and a dividend of $2.56, resulting in a (median) yield of 6.1 percent. As a rule of thumb, a stock purchased for income in such a market could be expected to yield at least 5 percent, or perhaps a bit more, say, 5.5 percent. It must be remembered that the prosperity of 1957 was somewhat inflationary, and that part of the reason for common-stock investment is to acquire extra dollars at a time when money value is depreciating. Anything less than a 5 percent return for the investor interested in income in 1957 would seem to be trailing the market and failing to justify the relative risk of stock investment as opposed, say, to the 3.25 percent interest obtainable from a savings bank.

In 1958, when the median return was 4.1 percent, an investor-for-income would have to revise his values and perhaps decide to run ahead of the market by shopping for a 5 percent yield. Or, if he could not find a satisfactory stock at that level, he might simply decide to defer buying until prices, generally, dropped a bit and yields improved. For a 5 percent return does not automatically make a stock a sound purchase any more than one over the 6.1 percent median is automatically risky.

In 1948, by contrast, the median yield was a whopping 7.8 percent, in which case an investor could reasonably expect to do no worse than 6 or 6.5 percent. He might even do considerably better. A median yield of 7.8 percent means that there were as many stocks paying above that figure as there were below. This being the case, some good stocks would have to be yielding 9, 10, and even 12 percent to strike the average. As always, only a close examination of a particular issue can determine whether its price and return are justified. At the upper percentage limits, it pays to be careful. No stock is wildly out of line with the market without a reason.

Very often a high percentage return is achieved through an extra dividend; make certain that the extra represents earnings, and not the sale of productive assets, which may reduce earning power in the months ahead. Often, too, a dividend figure represents the amount "paid last year" although the prevailing price, responsive to storm signals ahead, has already retreated, thus suggesting a phenomenal—and quite unlikely—yield in the future.

There is no need to be greedy. As the old saying goes, "A bull or a bear can make money in the market, but a hog never can." In even a moderately profitable period, the stock bought at a good price soon provides quite satisfactory dividends. Buyers at the 1948 lows have, of course, been receiving luxurious returns. Such a sterling stock as Consolidated Edison, which yielded 7.6 percent on a $1.60 dividend at its low of 21 in 1948, has subsequently upped its dividend to $3.00. For the current purchaser at around 62, the yield is 4.8 percent. For the 1948 buyer, it is over 14 percent.

It is easy to show how rich we all would be if all the opportunities presented us had been recognized and seized. But, as must be said every so often, the market also goes down. It's best to just hang in there during the tough times, and keep your portfolio diverse so that no slump is too devastating.

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