High Dividend Stocks Can Pad Your Income

Everyone wants to make money in the stock market. There are millions of participants in the markets today, and along with that millions of different styles. It ranges from the most daring risk takers all the way to the most conservative among us.

For each individual there exists a corresponding type stock. Many seeking a balance between risk and income often look to high dividend stocks. Some stocks are called growth stocks. These are aptly named in that the companies they represent are thought to have excellent prospects for greatly increased revenues and profits. Consequently, the stock is expected to rise rapidly.

Those drawn to growth stocks are seeking a high return from the price of the stock going up dramatically. Growth stocks tend to have a high price to earnings ratio. The price to earnings ratio (PE) is a simple calculation which divides the earnings per share into the current stock price. A stock with a high PE is said to be "expensive". The problem lay with the fact that something which is now expensive can quickly become "cheap" if expected earnings do not materialize.

This transition from expensive to cheap translates to your growth stock going down significantly incurring a loss. Hence, whereas growth stocks can have high rewards, they can also have significant risks. Those who can do without this high level of risk have the opportunity to select instead high dividend stocks. High dividend stocks are termed "income stocks". A dividend is a payment sent out by the company, usually once a quarter, to all of its shareholders.

Think of it as profit participation. If a given stock has a dividend of one dollar, and you own 1000 shares, you will receive $1000 a year from the company, usually in the form of $250 every three months. You therefore make money in two different ways. You can profit from the stock going up as always. Or, you can also profit even if the stock stands still cashing your dividend check each quarter. Even better, current tax rates provide for a very low 15% federal tax on dividends versus the 25%+ paid by most of us on earned income.

This higher rate is also paid on stocks bought and sold within the course of one year. Many "hyperactive traders" end up making more money for Uncle Sam than they do for themselves. Dividends are measured as a percent of a stock. For example, if a stock is at $50 and it pays a $2.50 dividend that stock is said to have a 5% dividend. This is also referred to as a dividend yield. All yields over 3.5% are considered high dividend stocks. Some yields can go all the way up above 10%, however, be careful.

Very high yields can be deceptive and signal and impending dividend cut. Do your due diligence. There are many different stocks in the large universe of the markets. If you want a stock which can quintuple you best look to growth stocks. If you want a steady stream of income with far less risk than high dividend stocks are for you.