where do dividends come from
Stock investment is all about making profit from the money you invested to buy those stocks. To achieve this, a lot of strategies are being devised by the market players to have their own cut of the cake being shared in the market. Some investors look for quick hits, while some target companies that they know that normally comes out with high dividends.
There are some companies with small earnings, but normally, they offer high earning ratio. This is a good strategy as some investors are ready to stake their money with the hope that they are not going to lose their money. When you place two companies side by side, one paying 10% annually and another is paying 10% in just a few days, of course, many investors will rush to the one that pays10% in a few days because investment is all about profits from your money.
To know the stock that will really give you a good return for your investment, check their price to earning ratio which is got by dividing the share price by the expected earnings per share. This gives you the growth rate of the company and that will help you to determine whether a stock is profitable or not, but note that nobody can absolutely predict the market. It may at-times go against your prediction. High P.E stocks mean bigger profits, but there are times when due to market forces, these high PE stocks will disappoint investors that are looking for “hot money” i.e. the bargain hunters. ….. When this happens, hot money exits the market en masse, leading to a dip in price thereby disappointing those still holding on to the stock.
For the experienced investor who doesn’t want to expose himself to too much risk in the market, he will simply remain with the high PE stock no matter the up or down in price because when they pay their dividends, he will cover whatever he might have lost in the dip in price, which was caused by the bargain hunters.
However, when the yields are extra-ordinarily high one needs to be very careful, this is because, if the bargain hunters leave en masse, the stock will be left with little or nothing and the prospect of them meeting up with their projected dividend may not be possible thereby leaving the investor with nothing to go home with, because their calculations have been drastically altered.
Before going into the market as a new investor, have an investment purpose, because what is good for “A” may not be good for “B”. After all, every pot gas a lid that perfectly matches them.
High paying stocks might be good for some one with super-charged absorber to absorb risks but may be highly risky for those looking just for a dependable source of income.
About the Author:
ThankGod Eze is an investment analyst with a passion for investing in stocks, real estates and other financial instruments. My investment goal is discover hidden but potential investment windows that guarantees maximum returns on invested funds. This site http://investmentpicks08.blogspot.com is a site that gives out free information on profitable investments.
Article Source: ArticlesBase.com – High Dividend Means Good Income:
Question: Do I have to pay capital gains and dividend tax on a Mutual Fund I plan to keep for 5 years?
I own some shares of a mutual fund. Will I be taxed in the coming years on the capital gains and dividends, even if I reinvest them and do not sell any shares?
And in what way will I be taxed?
Answer: Yes
Each year when your mutual fund earns dividends or capital gains, you receive your share and it is reported to the IRS on a 1099DIV. You receive a copy of the 1099DIV.
You report the information from the 1099DIV on your tax return, normally on Schedule B. This income is taxable in the year distributed by the fund, whether you reinvest the income or receive it as cash. If you reinvest this income in the fund, it is added to your original investment and will not be taxed again (your “basis”).
When you sell the mutual fund, if the selling price is more than your basis in the fund, you will pay capital gains tax on the increase in value.