Financial Markets Book Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
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by Robert Hashemian

Page 230

today (rightly or wrongly) pay less attention to dividends and more attention to the profit potential gained by buying and selling stocks. Your investment strategy would dictate how much importance you would place on dividend yields. Microsoft, which is perhaps one of the most successful stocks to date, still pays no dividends to its shareholders. And I seriously doubt you would be able to find any of the early investors complaining about this.

Payout Ratio - This value indicates the percentage of a company's annual earnings that are paid out to shareholders in the form of cash dividends. If this ratio is low, it means that either the company is using its earnings to expand or it may be buying back its own shares, which helps to elevate the stock price on a belief that this provides better return to the shareholders than paying dividends. If the ratio is high, it could mean that the company is either paying too much to its shareholders rather than investing the earnings in the business, or the earnings have been low and the company has been unwilling to reduce its dividend payout, thus spending most of the earnings on its shareholders. A payout ratio of about 40% is considered a moderate amount for well established companies where conservative investors may be interested. But this value varies quite a bit from company to company. For example, Norfolk Southern has a payout ratio of about 83% while Intel's payout ratio is about 6%. Of course Microsoft, which pays no dividends, has the payout ratio of 0%. (Note: Since this writing, Microsoft has been paying dividends.)

Valuation Ratios
Valuation ratios are used to value a stock price. If you ever wondered whether a certain stock is too expensive or too cheap or right on, the valuation ratios is where you would look to make that determination. Valuation ratios are sometimes referred to as multiples, since in all cases the ratio is arrived at by dividing the stock price by a certain factor of the company. Think of it this way - if you want to buy a sandwich

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Copyright and Disclaimer
Book Chapters
Table of Contents Copyright and Disclaimer Foreword Money
Bonds Futures Stocks Options
Mutual Funds Retirement Final Words Appendix A

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