Profiting Twice in the Stocks and Dividends Game

Jan.28.09 | About: General Electric (GE)

In the world of common stocks there are two major ways to profit. The first is through appreciation of the price of a share of a particular stock. The second is to bank the dividends paid by a particular company. It is the second method that we are going to be talking about today.

Stocks and dividends are not a particularly difficult subject to master. A stock is share of ownership in a corporation and a dividend is a monthly, quarterly or yearly payout to owners of that corporation. Let's look at a real world example.

Let's say you own 100 shares of XYZ corporation which trades at $100 a share. The XYZ corporation has a declared dividend of $1.00 a quarter (or four dollars a year). Your dividend yield for this particular position would be .04% per year. So the company would pay 4% of your investment back to you each year.

So, to continue the example, let's say that you owned 1,000 shares of XYZ, the purchase of which would cost you $100,000. After twelve months you will have received 4 dividend payments of $1,000. At the end of this period you'd have 4,000 or .04% of your initial investment.

Seeing as you can bank .04% in a risk free bank account, you may be unimpressed by this return. However, one can profit twice when playing the stocks and dividends game. You will receive 4% annually in the form of dividend checks while also participating in any gains in the underlying security.

So, though this may be hard to fathom after the year we have had, let's say that your shares of XYZ appreciate from $100 to $110 in a given year. In this circumstance you will gain both the $10 per share price appreciation (assuming you locked in this gain by selling), as well as the $4 per share dividend check. This would result in your total investment being worth approximately $114,000, resulting in a gain of 14%.

Naturally, 14% in a single year amounts to a phenomenal investment. And in these times investors in stocks should pay extra heed to the dividend. For instance, let's look at a current example. General Electric (NYSE:GE) currently yields $1.24 annually on a share price of 13.06. This amounts to an annual yield of 10.3%. Very appealing, no?

However, in this economic market it would not be shocking to see a corporation like GE cut its dividend. Regardless, it is possible (or even likely) that GE will maintain its dividend. Therefore, one can profit approximately 10% annually by buying into General Electric at these prices.

Is there some risk? Absolutely. However, a staid, economic giant like GE does not cut its dividend without fear of massive blowback. And at these prices you can count on a 10% return going forward plus gaining any capital gains from the gains in the share price.

So, in closing, consider stocks and dividends, not just stocks. There are two ways to profit in the market and share appreciation, while certainly the sexier alternative, is not the only game in town.