Investing Online: High-Payout Investment
For all of you active investors out there, most likely you are seeking high-payout investments. If you don’t have much patience or are ravenous, you want money soon, regardless of the risk you must take. Before you chase after a high-payout investment you should be aware of what you’re getting into.
Savvy investors by all means inquire about the payout ratio of a particular investment before jumping on it. Payout ratio is defined as the funds a company disburses to shareholders in comparison to how much it retains for itself. This can be done in a matter of seconds and will save you a great deal of money in the long run. Knowing this ratio can help you determine how much you will receive in the future.
Understanding Payout Ratio
What exactly is this ratio and how does it work? Once you purchase at least one company share, you own a part of that entity.
Payout Ratio = Dividends per Share / Earnings per Share
So if the payout ratio is 1:10, it can be expressed as.10 or 10%. That means your dividend is 10% of their earnings.
The remainder of the funds, 90% is then invested back into the business to help it grow. Hence, for a high payout, the closer the two numbers are to equaling one-another, the higher the ratio ($7:$8 means an 87.5% payout ratio). A higher ratio is not always better.
Investing In High Ratio Companies
Some companies have a payout ratio of over 100%. How can that be? Either that entity has a high debt ratio or used the funds in its savings to pay dividends.
Is investing in a company with too high of debt ratio dangerous? Not necessarily. There are many entities that have a bad year causing a surge in their debt ratio. However, as an investor you need to reduce as much risk in your portfolio as possible. You can never rely on a company reducing its debt ratio or expect to receive payments if their ratio is high. Therefore, you will want to focus on companies with a 75% ratio or lower.
Company size is another factor to consider. This means researching company profiles to determine their annual sales revenues, their financial sources, the type of ownership (partnership, corporation, etc), management structure(vertical communication, authority-based influence, etc), and their market shares. Knowing their history and stability are essential before investing. If there are no profiles available, consider another entity.
The Higher the Payout, the Greater the Risk
The higher the payout an investment has, the greater the risk it carries. Investing in high-risk companies isn’t worth taking the chance, especially if you’re a novice. Such investments may be worth trying, that’s of course if you have extra money to burn.
However, investments offering high-payout dividends can provide you with a lifelong income. Receiving dividends regularly will help you in financial planning and possibly future investments.
Doing research may seem arduous, but skipping this task will most likely cost you a great deal of money later.