What Is Stock?
Shares of Stock
Part 2

What about dividends?

Dividends are certainly more tangible income than potential earnings increases and stock price increases, so what does it mean when a dividend is non-existent or very low?

And what do people mean when they talk about a stock's yield?

To begin with the easy question first, the yield is the annual dividend divided by the stock price. For example, if a company is paying 1 per year and is trading at 10 per share, the yield is 10%.

A company paying no or low dividends (zero or low yield) is really saying to its investors -- its owners:

"We believe we can earn more, and return more value to shareholders by retaining the earnings, by putting that money to work, than by paying it out and not having it to invest in new plant or goods or salaries."

And having said that, they are expected to earn a good return on not only their previous equity, but on the increased equity represented by retained earnings.

So a company whose book value last year was 10 and who retains its entire 1.50 earnings, increases its book value to 11.50 less certain expenses.

That increased book value - let's say it is now 11 -- means the company must earn at least 1.65 this year just to keep up with its 15% return on equity.

If the company earns 1.80, the owners have indeed made a good investment, and other investors, seeking to get in on a good thing, bid up the price. That's the theory anyway.

In spite of that, many investors still buy or sell based on what some commentator says or on an announcement of a new product or on the hiring (or resignation) of a key officer, or on general sexiness of the company's products!

And that will always happen!

What is the moral of all this?

Look at a company's financials and ...

Do some homework before buying!

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