How to invest in stocks could be covered in as little as one word or as much as ten volumes. The one word answer is “carefully.” You won’t get a complete course in the space allotted to me here, but I will give you some basics on getting started and tantalize you with the income enhancing potential of dividend stocks.
Opening a brokerage account isn’t all that difficult, and there are several online brokerage firms that can get you started with as little as $100 in your account. As a practical matter, $100 won’t buy you much when you consider the average cost per share of the 30 corporations that comprise the DJIA is over $370. On the other hand, some companies trade for less than $10. Each trade can cost you anywhere from $4 to $12.95 at current rates. Now that isn’t per share, but per trade. So for $104 you could buy 10 shares of Bank of America (currently trading around $10 per share) for $100 minus a $4 fee.
Now consider this, you have spent $96 for stock and paid $4 for the trade, a total of $100.00. Just to break even, your shares will need to rise in value to $7.31. That is a 4.43% increase in value. But wait! To truly break even, the stock will need to rise to $7.62 in value…why?…because it is going to cost you another $4 to sell it (In other words you need it to be worth the original $96, plus the $4 fee to buy it and the $4 fee to sell for a total of $104). Now you may not know a great deal about the stock market, but I’ll bet you know that an 8.86% increase in price is not typically an overnight occurrence!
Two things should already be apparent to you.
- You should buy the largest number of shares you can afford to minimize purchase costs.
- You shouldn’t expect to get rich overnight.
Here endeth the first lesson.
Like many of us, you’ve probably got a 401k, maybe an IRA or a Roth IRA, even a plain old savings account at your local bank, and that’s GREAT! Investing is a critical component for future success and happiness. The downside of investments like this are that returns aren’t always high. The interest earned for money in your bank’s passbook or statement savings account is paltry at best. Even a 10 year Treasury note is only yielding 1.69%! True, treasuries are regarded as extremely safe, but what a cost we pay for that safety!
If I told you that there are a number of publicly traded companies issuing stock that pay dividends 2 or 3 times the 10 year Treasury note pays, would you be interested? If I told you that these companies have an excellent history as an investment, would you be even more interested? If I told you that these companies are currently represented in Warren Buffett’s portfolio, would you read on? YES, I thought so!
Now before we go any further, please understand … I am using these companies as examples only. They are meant to illustrate why you should consider dividend investing. I am NOT recommending these stocks.
First, Gannett Co., Inc., is a Warren Buffett holding. It trades at about $15 per share and has a market cap of around $3.5 billion. It employs 31,000 people, publishes 82 daily newspapers in the United States, and was founded in 1906. Based on discounted cash flow, the stock is undervalued by almost 63%. This stock pays a $0.20 quarterly dividend and that translates to an annual yield of 3.6%. More than twice what you would receive if your money was invested in a ten year Treasury note.
Buffett doesn’t own this one yet, but Cliff’s Natural Resources Inc. trades at about $39 and has a market capitalization of $5.6 billion. Cliff’s employs 7,407 people and was founded in 1847. Its primary business is mining iron ore and coal. On a discounted cash flow basis, this stock is undervalued by 245%. Cliff’s Natural Resources pays a quarterly dividend of $0.625, and yields 4.6%. That’s more than 3 times the yield of a ten year Treasury note!
No one would argue that an investment in stock doesn’t carry a greater element of risk, but if you research the company thoroughly and perform your due diligence in evaluating the stock’s performance, you can find a stock that you are comfortable with owning. In other words, it won’t keep you awake at night!
I hope you’ll let us know if you are interested in seeing more articles on the subject of investing in the stock market! Please share your stock experiences with us too!