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Dividends versus capital gains

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Looking as an investor, the safer (yet maybe boring) route is through collecting dividends, and this is a consistent and effective way to accumulate wealth over time. I think that when looking at capital gains you are looking to make more quick money and this can be the case, but it is also the more risky choice. It is might not be the most glamorous way to make money, but the older I get and closer to retirement age I will switch from the risky stock market and buying and selling of stocks to just maintaining my current stocks with well-established companies to keep accumulating money a little bit more safely than the alternative. I currently reinvest some of my payroll money into my company through an employee stock purchase plan that I also reinvest the dividends back into buying more shares. I believe my company is very financially sound and that is one thing that needs to be looked at when investing in capital gains. The economic environment is ever changing which gives dividends that leg up.

Respond to above statement.

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As an investor, you would be looking for your investment to grow, preferably at a rate faster than inflation. Companies that pay dividends are attractive to investors because they are a predictable source of income. Dividends are a buffer for market fluctuations, and owning stocks offers the potential for capital appreciation. By looking for capital gains, you are most likely playing the market as a technical investor, who looks at charts of past historical performance to predict the supply and demand of a stock. By looking at dividends, you are most likely acting as the fundamental investor, who looks at financial statements to gauge the stability of a company. These two types of investment methods require different skills.

When you invest for the purpose of increasing capital gains, you might subscribe to stock advisor newsletters, and watch the stock prices every day, to determine a good time to buy or sell. You are buying the stock for the short term and may move your money to a different stock if the opportunity arises. If you are investing in dividend-paying stocks for a steady income stream, you will need to learn to ignore the market, and ignore the doomsday reports. If you sell the dividend-paying stock, you will no longer have the income stream. It is worse if you sell when the market is down. Unfortunately, many investors panic and sell when the market is down in order to cut their losses. When you hold dividend-paying stocks, consider yourself to be a buy-and-hold investor who has chosen a company to invest in long-term.

Although it is true that investing by hoping for capital gains is generally seen as a risky way to make fast money, there are exceptions. Note that ...

Solution Summary

This solution provides an explanation regarding the differences between dividends and capital gains. It is answered in 1160 words.

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High Dividends vs. High Capital Gains

Question 1

Discuss a real world decision that you have analyzed (like a capital budgeting decision or security investment). Explain how you might now go about setting up the "investment decision."

Question 2

If you were to purchase a stock, would you be looking for one that paid high dividends or high capital gains? Explain your answer.

Question 3

When the Bell System was originally broken up, the old AT&T was split into a new AT&T plus 7 regional telephone companies. The specific reason for forcing the breakup was to increase the degree of competition in the telephone industry. AT&T had a monopoly on local service, long distance, and the manufacture of all the equipment used by telephone companies, and the breakup was expected to open most of these markets to competition. In the court order that set the terms of the breakup, the capital structures of the surviving companies were specified, and much attention was given to the increased competition telephone companies could expect in the future.

How do you think the optimal capital structure after the breakup compared to the pre-breakup optimal capital structure? Using the concepts learned in this objective, explain your position.

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