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A different way to look at stock investing
12 Jun 2021 (549 views)

Many people are afraid to invest in stocks because it is risky. The are afraid that the stock price may fall and they lose money on their investment.

I like to suggest a different way to look at the investment.

The stock price does not matter. It is the future profits of the company that is more important and also the dividend that is paid out from the profits.

The investor should look at the dividend that is paid out on the stock and compare it against the stock price. This is called the dividend yield. 

Most large companies are able to pay out a dividend of around 3% of the stock price. 

In a period of low interest rate, a dividend yield of 3% is considered to be quite good.

The dividend is not fixed and not guaranteed. It may fluctuate from year to year, depending on the profit of the company. It should be possible for the investor to study the dividend paid in past years, during periods of high and low profitability, and get the average dividend paid.

Another important financial indicator is the earnings (or profits) of the company per share divided by the share price.

Many well established companies have a earnings yield of between 5% to 10%. 

The inverse of the earnings yield is the price earning ratio. This is the price of each share divided by the earnings per share.
Typically, the PE ratio should be between 10 to 20.

A low PE ratio means the share is cheap relative to the profits 
​​​​
The company declares about a part of the profits as dividend and keeps the rest of the profit in the company for its future growth.  The proportion of the profit that is paid is dividend is called the "payout ratio". This ratio is typically 30% to 80%.

This is likely to result in the future profits and dividends of the company growing over the years, due to the retention of part of the profits. 

A long term investor should look at the dividend yield, the earnings yield and the payout ratio. The stock price does not matter. Even if the stock price drops below the cost price, it does not affect the future return that will be paid on the stock.

There is a real risk of investing in stocks that the investor should be aware of. This is the risk that the company can become insolvent and has to be dissolved. In that case, the value of the investment can be totally lost.

To avoid this risk, the investor should only invest in shares of large and well established companies.  These are usually described as "blue chip companies".

I wish to summarise the key points:

a) Invest in large and well established companies

b) Look for a stock that pays a dividend of 3% or higher an earns a profit above 5% or more on the current share price (i.e. have a price earning ratio below 20 times).

c) Do not worry about the stock price, unless you have to sell some of the shares. At that time, sell only the number of shares that you need to realize the money that you need for other purpose.

If the investor can look at investing in this way, the investor is likely to favor investing in shares to get a dividend yield that is higher than the interest rate on bonds or loans.

Tan Kin Lian


A different way to look at stock investing
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Many people are afraid to invest in stocks because it is risky. The are afraid that the stock price may fall and they lose money on their investment.

I like to suggest a different way to look at the investment.

The stock price does not matter. It is the future profits of the company that is more important and also the dividend that is paid out from the profits.

The investor should look at the dividend that is paid out on the stock and compare it against the stock price. This is called the dividend yield. 

Most large companies are able to pay out a dividend of around 3% of the stock price. 

In a period of low interest rate, a dividend yield of 3% is considered to be quite good.

The dividend is not fixed and not guaranteed. It may fluctuate from year to year, depending on the profit of the company. It should be possible for the investor to study the dividend paid in past years, during periods of high and low profitability, and get the average dividend paid.

Another important financial indicator is the earnings (or profits) of the company per share divided by the share price.

Many well established companies have a earnings yield of between 5% to 10%. 

The inverse of the earnings yield is the price earning ratio. This is the price of each share divided by the earnings per share.
Typically, the PE ratio should be between 10 to 20.

A low PE ratio means the share is cheap relative to the profits 
​​​​
The company declares about a part of the profits as dividend and keeps the rest of the profit in the company for its future growth.  The proportion of the profit that is paid is dividend is called the "payout ratio". This ratio is typically 30% to 80%.

This is likely to result in the future profits and dividends of the company growing over the years, due to the retention of part of the profits. 

A long term investor should look at the dividend yield, the earnings yield and the payout ratio. The stock price does not matter. Even if the stock price drops below the cost price, it does not affect the future return that will be paid on the stock.

There is a real risk of investing in stocks that the investor should be aware of. This is the risk that the company can become insolvent and has to be dissolved. In that case, the value of the investment can be totally lost.

To avoid this risk, the investor should only invest in shares of large and well established companies.  These are usually described as "blue chip companies".

I wish to summarise the key points:

a) Invest in large and well established companies

b) Look for a stock that pays a dividend of 3% or higher an earns a profit above 5% or more on the current share price (i.e. have a price earning ratio below 20 times).

c) Do not worry about the stock price, unless you have to sell some of the shares. At that time, sell only the number of shares that you need to realize the money that you need for other purpose.

If the investor can look at investing in this way, the investor is likely to favor investing in shares to get a dividend yield that is higher than the interest rate on bonds or loans.

Tan Kin Lian