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That elusive strategy

Posted by on 2. August 2013

Strategy – what type of investments to buy with my money? A big word, how can I best get my arms around it? In the technical lingo of financial investments, how risk tolerant am I? Can I tolerate to lose all the money in the account and still be able to pay my daily cost of living? Do I have a pressing need for the funds within the next 5 years (as much as that question can be answered today)? Do I rely on the funds to be some level of reserve, a just in case source of funds?

My personal answers to any of those questions: a firm ‘No’. I am aware that this may not be the case for everyone out there. So let me re-iterate: if you are planning for a PERSONAL and INDIVIDUALISTIC start in the exciting world of investing, ONLY do it with money you can truly spare and live without! Proceed at your own risk!

Back to the strategy. My personal idea of strategy would be for the invested capital to grow and appreciate by way of stock price increase as much as possible. If you have spent any time whatsoever so far observing the stock markets, let alone individual stocks and their price movements, that is quite a rollercoaster ride. And it doesn’t always go up, let alone, advertise which direction it is about to take.

While able to stomach quite a bit of risk, I do not think putting all my eggs into a single basket and hoping for the selected stock to rise enough in share price to outpace inflation, capital gains taxes and still provide for some income…. get real, not going to happen. I am not a day trader, nor do I aspire to become one.

Long term, that approach would only add to the number of gray hair and increase in blood pressure, and not do a thing to cause my bank account to become a little more plump.

OK, so what else can we do?

It would sure be nice if the chosen company would pay its shareholders for holding their shares, sharing some of the profit it is able to generate from my invested funds. That concept does exist indeed, and it is called Dividends.

Given the amount of funds I have at my disposal initially, $1000, what kind of indicators should I employ to maximize the potential for dividends?

Dividend yield alone? A yield of 4% sounds good, much better than the current interest rates any bank or money market fund pays these days.

We all know the statistical advantages of referencing something as a percentage. Let’s add a dash of reality to that percentage value. Let’s assume an average price of an illustrative stock: $50. At 4% yield, that would equal a $2 dividend payment, which is paid out on a quarterly basis, usually. So, for our example stock, we would be receiving 50 cents every 3 months for every share owned.

Given our investment amount of $1000, we would own a whopping 20 shares. Do the math: 20 * $.50 = $10 / quarter. $40 / year.

mmmhhhhhh….. let’s think about that for some time.

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