Alpha Teach Yourself Investing in 24 Hours: An Analysis (part 26)

Classifications of Stocks (part B)

by

Charles Lamson

Income Stocks

Finding income stocks is a little more straightforward than deciphering growth stocks, which we covered in the last post. For starters, a stock either generates income or it does not. Income is in the form of dividends.

One of the ways to judge whether a company is paying a reasonable dividend is to use the dividend yield calculation, dividing the annual dividend by the stock's price.

JUST A MINUTE Generating income in the form of dividends only tells part of the story. How do the dividends relate to the stock price? Are they expensive or cheap? The dividend yield tells you the answer.

In the case of AT&T, the dividend yield is 1.6 percent at the time the chart was created in 1999. Dividends are set once a year by the board of directors. They can raise, lower, or eliminate the dividend based on the company's financial condition.

As you might have deduced, the dividend yield is not a static number. As the per-share price fluctuates, the dividend yield will change. In our example above, the per share price was $57 and the annual dividend per share was $0.88. If the per share price goes up, the dividend yield will go down. For example ...

Dividend	Stock Price	Dividend Yield
$0.88	$57	1.6 percent
$0.88	$47	1.9 percent
$0.88	$67	1.3 percent

As you can see, when the price of the stock moves in either direction, the dividend yield changes.

PROCEED WITH CAUTION Do not latch on to one number or ratio as the key to investment decisions. Looking at an investment in the proper context is the key to sound decisions.

This means that for the price you have to pay to buy the stock, the yield is dropping. If you are thinking about buying this stock for its income, this low yield may seem unattractive.

On the other hand, if you already own this stock you may want the dividend to go up, but you cannot be too unhappy that the stock price has taken a major jump.

Morningstar classifies a stock as "high yield" when its dividend is more than twice the large-cap average.

Dividend History AT&T	12/95	12/96	12/97	12/98	12/99
Dividend $	0.88	0.88	0.88	0.88	0.88
Year-end Yield %	2.0	3.0	2.2	1.7	1.7
S&P 500 Yield%	1.1	1.0	0.8	0.7	0.6

*Source: Morningstar.com

As you can see, AT&T had a steady history of dividends for those five years. Without seeing the numbers, you can track the fluctuations in the share price by the changes in the "year-end yield percent" from 1995-1999.

Income stocks are much easier to find and rank than growth stocks. Access to information like that from Morningstar.com makes the searching much easier.

*ALPHA TEACH YOURSELF INVESTING IN 24 HOURS, 2000, KEN LITTLE, PGS. 172-174*

END

JUST A MINUTE

Generating income in the form of dividends only tells part of the story. How do the dividends relate to the stock price? Are they expensive or cheap? The dividend yield tells you the answer.

Dividend

Stock

Price

Dividend

Yield

$0.88

$57

1.6 percent

$0.88

$47

1.9 percent

$0.88

$67

1.3 percent

PROCEED WITH CAUTION

Do not latch on to one number or ratio as the key to investment decisions. Looking at an investment in the proper context is the key to sound decisions.

Dividend

History

AT&T

12/95

12/96

12/97

12/98

12/99

Dividend $

0.88

0.88

0.88

0.88

0.88

Year-end

Yield %

2.0

3.0

2.2

1.7

1.7

S&P 500

Yield%

1.1

1.0

0.8

0.7

0.6