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Dividend as an argument to buy stocks

Compare shares with a high return on investment

When it comes to investing money, arguments can be found for the one or the other product. For example, overnight money is a secure and flexible form of investing money while stocks and investment funds are seen as producing a rather high return on investment. Sometimes, there are different reasons why investors decide to go for one or the other product. This is the case when it comes to stocks as a possible investment. There are two main reasons why investors should buy stocks, apart from the fact that you buy the right to vote in the annual general meeting of the respective company, getting a part in deciding the company´s future.

The first reason are possible stock price gains, increasing the return on investment to a level that is above the interest rate one can claim for other forms of investment. The second reason is the annual income shareholders receive in form of dividends. The dividend as an argument to buy stocks is mostly valid for investors who do not want to receive a return on investment as high as possible because that is only possible through stock price gains. Instead, these investors focus on a secure amount of money that is a sign for a stable company. Basically, only companies which are earning money are able to pay dividends to their shareholders. If the dividend is a reason for the investor to buy stocks, it is important what information about dividends paid by the respective company is available. First of all, one should check whether the dividends paid over the previous years have been steady. Sometimes, a company has a very good year and decides to pay high dividends to its shareholders while it has been rather low over the previous years. When comparing different stocks with regards to the dividends paid, one should not compare the absolute amount of money paid. Much more important is the rate of return. The absolute amount paid out is not especially significant. If a listed company pays $10 per share, it obviously does sound like a lot. If the stocks of that company are listed at around $800, however, the rate of return would be only slightly above one per cent. Therefore, it is important to set the absolute amount of money paid out in relation to the stock price, i.e. calculating the so-called dividend yield.