Wednesday, October 26, 2011

The Top 3 Things to Consider when Investing in Stocks

Investing on your own has for many become a scary proposition. There are many ways to determine if a company is worthy of your investment dollars. If you are armed with the right information you can make a informed decision on which stock to invest in. The top three factors when looking at companies to invest in are Dividend Yield, Earnings Per Share and Price/Earings ratio or multiple.

Dividend Yield

As an owner of a stock you will benefit when the company makes money in the form of profits. Often the profits are divided amongst the owners in the form of a dividend, usually paid quarterly; dividend yield is one way to judge the financial health of a company. To calculate the dividend yield take the amount of the dividend and divide it by the price of the stock. For example if AT&T (T) is trading at $28.00 per share and pays a dividend of $1.68 per year, then the dividend yield is 6.00%, ($1.68/$28.00=6%). A high dividend yield is a good indicator that the company is profitable enough to reward the investors with a payment.

Earnings Per Share

Earnings are often annonced on CNBC and the nightly news. Earnings per share is another indicator of the financial stability of a company. The earnings per share is calculated by dividing the total number of shares outstanding and the total net profit. For example if AT&T has 1 Million shares outstanding and has a net profit of $500,000 for the quarter then the company's EPS is $.50 (1,000,000/$500,000=$.50). Most companies will only pay a portion of the profits in the form of a dividend, leaving the rest for reinvestment back into the business. A company that pays a dividend provides income for the shareholders for each share owned. If you own 100 shares of a company and the quarterly dividend is $0.25 per share then your payment is $25 per quarter. The more shares you own increases your share of the profits.

Price to Earnings Ratio

Price-Earnings Ratio - P/E Ratio is a valuation ratio of a company's current share price compared to its per-share earning. For example, if AT&T is currently trading at $43 a share and earnings over the last 12 months were $1.95 per share, the P/E ratio for the stock would be 22.05 ($43/$1.95). Earnings per share is usually from the 12 months or it is from the estimates of earnings expected in the next 12 months. Also sometimes known as "price multiple" or "earnings multiple". When considering an stock, a high P/E ratio suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E ratio. The P/E is sometimes referred to as the "multiple", because it shows how much investors are willing to pay per dollar of earnings. If a company were currently trading at a multiple (P/E) of 20, that means that an investor is willing to pay $20 for $1 of current earnings.

Investing in individual stocks is not only for serious investors. These 3 factors should always be considered when investing in stocks. Both beginner's and veterans can make sound investment decisions armed with the right information.

Dividend News

AT&T Declares Quarterly Dividend

The board of directors of AT&T Inc (NYSE:T) declared a quarterly dividend of $0.43 a share on the company’s common shares. The dividend is payable on November 1, 2011, to stockholders of record at the close of business on October 10, 2011.