Determining What You Really Earn
The test of profitability can be estimated from an accurate reading of the stock listings. The test of volatility provides a good indication of market risk, and the test of total return potential indicates the prospects for long-term yield.
Total return is the combination of dividend yield and change in price. Thus, you can evaluate stocks by comparing dividend yield alone—assuming that all have identical price appreciation potential. Because you cannot know the future of market price trends for a stock, this is a sensible way to eliminate investment candidates. The first step is to develop a list of stocks that have what you consider identical fundamental potential. The second step is to compare dividend yield to forecast future yield. Total return includes dividend yield, so a stock that pays little or no dividend may have a lower potential total return. However, a different argument may be made concerning dividends. Some companies argue that paying out dividends curtails the ability to reinvest profits to create future expansion, so nonpayment of dividends actually enhances future market price potential.
The decision to seek higher dividend income, or to ignore the value of dividend yield, has to be made individually. The debate over the real value of dividend payments cannot be settled conclusively. Some people invest primarily for dividend yield, with price appreciation a secondary consideration. Others put little value in dividends other than as indicators of continued management of profits. Some fundamentalists like to track dividend payments to ensure that a payment ratio is maintained over time. A reduced dividend or missed dividend would be a very negative sign. To some fundamental analysts, changes in dividend policies are far more valuable for fundamental signal value than the receipt of a dividend check.