Being a profit hunter is a natural part of being an investor.
However, you have to be very careful to ensure that you’re profit-hunting smartly, and not ignoring huge paydays because you’re going in blind.
Luckily for you, I’m here to make sure you don’t fall victim to seemingly get-rich-quick income stock picks and instead make the most money you possibly can.
We usually see profits coming from two different places in the investing world.
We have investment income and capital gains.
As a technical analyst, I tend to lean towards capital gains, which also may be what you think of when you think of typical investing in the stock market.
Your capital is the money you initially invest in a stock, so capital gains are the profits made if that stock goes up, and you sell it at a higher price than what you bought it at.
For our purpose right now, when I say investment income I’m talking about dividends.
Dividends are what some companies pay out to their shareholders, usually a percentage of the stock price for every share an investor owns.
Many investors are attracted to this way of making money in the stock market, because you receive the money automatically when a company decides to give a dividend, as opposed to the profits from capital gains, which you only receive once you’ve managed to sell your stock back.
Now I know this probably sounds pretty complex, but you don’t need to try and figure out the why or how of it, you just need to trust me.
To make it a little easier to digest, let’s look at some examples.
While most companies that give out dividends give very small yields, such as a percent or two, some offer huge dividends.
One such example is Wheeler Real Estate Investment Trust (WHLR) which offers a staggering yield of 27.15%!
Now that number may seem significant, but it means absolutely nothing until you take a look at the chart for WHLR.
The chart is abysmal and has been in a steady decline for months now.
You have to remember that the yield announced by the company comes from whatever the stock price is the day they give out dividends.
If WHLR was paying out dividends today that whopping 27.15% would only amount to about $1.35 per share.
Unfortunately, since the stock has been decreasing so steadily, by the time WHLR actually gives out dividends, that number will likely be even smaller.
Another example is Compass Diversified Holdings (CODI), offering a 8.09% yield which is still far higher than any average yields.
The chart for CODI also looks pretty terrible, not necessarily because of how low it is, but because of how much it moves up and down day to day without making any progress ever.
That is not what makes for an attractive chart and a strong stock.
While it can be tempting to invest in these income stocks that offer dividends, you cannot be investing blindly.
Another big difference between investment income and capital gains is that investment income is determine by the company—they decide whether or not to give dividends and how much to give.
Capital gains, on the other hand, come to you by way of the stock market, and whether the stock has gone up or down in price.
The company cannot control how much money you make, and they can’t prevent the money from coming to you.
In a world where it can be hard to trust the Wall Street guys, not having to rely on them for your money is always a good thing.
Something else to keep in mind is that capital gains are often taxed lower than dividends, so that’s another plus.
At the end of the day, dividends and capital gains are both ways of receiving a return on your investment.
When it comes to investing, you can’t rely on one piece of information to give you a full picture of how profitable a stock really is.
You need to be able to process and analyze all of the information out there to make an educated decision, and remember that the numbers don’t lie.
It can be an exhausting process, but lucky for you, I’m here to do all the work for you, so all you have to do is let the profits pile up!
