When you make a profit, are you taking 100% of the potential profit?
Are you sure?!
I would say to check when you make your next profit, but I’m here today to make sure you’re taking 100% of your available profits from here on out…
Don’t leave dollars on the table when they should be hitting your account!
To give you a better picture, I’ll put it like this:
We typically see profits coming from two different avenues in the investing world. We have investment income and capital gains.
As a technical analyst, I lean more towards capital gains, which may be what you think of when you picture typical investing in the stock market.
Your capital is the money you initially invest in a stock, therefore capital gains are the profits made if that stock goes up (assuming you sell it at a higher price than what you bought it at).
For today’s exercise, when I say investment income I’m strictly talking about dividends.
Dividends are what companies pay out to their shareholders, usually a percentage of the stock price for every share you own.
Many investors are attracted to this method of making money in the market, because you receive the money automatically when a company gives a dividend, as opposed to the profits from capital gains, which you only receive once you’ve managed to sell your shares.
Now I know this probably sounds complex, but you don’t need to try and figure out the why or how of it, you just need to listen to me.
To make it a little easier, let’s look at some examples.
While most companies that give out dividends provide very small yields such as a percent or two, some offer huge dividends.
One such example is Pioneer Natural Resources Co (PXD) which offers a staggering yield of 13.86%!
Now that number may seem significant, but it means absolutely nothing until you take a look at the chart for PXD.
The chart is abysmal and has been sloppy for months now, meaning that percentage is decreasing as the stock price does.
Another example is Annaly Capital Management (NLY), offering a 17.31% yield which is far higher than any average yields.
The chart for NLY also looks dreadful, 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 a lucrative stock.
While it can be tempting to invest in these income stocks that offer high dividends, you can’t 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 reissue their dividends and how much to give.
Capital gains, on the other hand, come to you by way of the free market, and whether the stock goes up or down in price.
The company cannot control how much money you make, and they can’t prevent the money coming to you.
In a world where it can be hard to trust the Wall Street guys, not having to rely on them is always a good thing.
Something else to keep in mind is that capital gains are typically taxed lower than dividends. This is where leaving some of your profits on the table comes in.
Would you rather pay the Government ~25% or ~15%of your gain? I know which one I’d choose.