Dividend Investing and value picking are two different strategies to make money from the stock market. Each has its own benefits, but which is better?
Well let us take a quick look at how they differ.
When you are income investing you are simply finding a list of dividend paying stocks then start buying the ones which pay out the most. The major advantage of this strategy is that you are going to get a monthly income from the stock for a relatively small amount of work.
If you can find a stock that is paying you money, why not invest in it and reap the rewards. However the major downside to income investing is that it does not guarantee that you will make money, as if anything actually does.
Just because a stock is paying out a nice dividend does not mean it will be a profitable investment. If it drops to $0 in the next few months it doesn’t really matter how much they were paying you because they don’t exist anymore.
So you are risking getting into a stock which will go to zero.
Value investing on the other hand is a different way of looking at things. This takes into consideration many different factors in order to be able to determine the companies overall strength.
One of the main indicators which value investors look at is called the P/E ratio. So, What is the PE Ratio? This ratio simply tells the investor how expensive the stock is when compared to its earnings.
So if the stock is trading at $40 and its earnings per share was $2 then its PE would be 20. This number could be taken and compared to other similar companies in the industry in order to pick the best investments out there. Typically the lower the PE ratio the cheaper the stock and the better investment it is.
This this is only one example of a method you can use to determine the strength of the overall company. Many investors will actually combine it with other methods to increase your chances of getting into a good investment.
Checking out the company’s fundamentals can take a lot of research, but it can be worth the time in the long term.
So, which strategy is better income investing or value investing? Maybe the real question here is why do you have to choose? Combing income investing with value investing can let you get into companies which you believe will be around and growing for a long while with companies that are paying out a health dividend.
You may decide to put more enfaces on one strategy over another, but by combining them you are able to benefit in two different ways, both by the dividends and hopefully by appreciation.
Another great benefit you get when you combine the two strategies is that you lessen the chance that you are going to get into a company that is not strong and is just going to go bankrupt after you buy it.
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