This refers to a company’s dividend per share in a year, or the company’s total, yearly dividend payments divided by market capitalization (Hussman Funds1998). It is used to calculate a company’s earnings on the investment. High and low values of Dividend Yield may be as a result of the company’s declared annual dividend and the current market price. The yield, essentially, is the ratio of the yearly dividend to the current market price, which varies.
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Market price per share divided by yearly earnings per share gives the P/E Ratio. Investors use this as an equity valuation measure (Ranganatham 2004). High annual earnings per share lowers the P/E Ratio, whereas low earnings per raises its value. Fluctuating market prices may lead to an ineffective and unreliable P/E Ratio because it may constantly change within short periods.
This refers to the ratio of a company’s net income to the dividends that shareholders receive. The level of dividends that shareholders receive determines the value, high or low, of the dividend cover. Investors use this as a measure of how much they expect to earn from their undertaking. Sometimes, a company may dish out high dividends to its shareholders as an attraction to investors, although it may cripple the company’s operations in the long run.
This refers to the full value of issued shares of a publicly traded business entity (Market capitalization n.d.). Investors may use this as a proxy for assessing a company’s net worth. Initial Public Offers (IPOs) may yield a lot of finances, beyond the targeted value, for a company. This may exaggerate a company’s net worth.
Diversification within Jim’s Portfolio
Although Jim’s current desire to have quick income-generating investment opportunities in the form of dividends, he also has a keen interest in putting his finances into ventures with a view to future expansion. This is a diversification mechanism which guards this enthusiastic entrepreneur against unexpected downfalls.
Indicators: Dividend Yield, P/E and Dividend
Jim is keen on monitoring the dividend yield, P/E ratio and dividend cover of the companies he has invested in, or plans to invest his income. This is vital because they give him a clue, though not accurate at all times, about the performance of those companies and the feasibility of his investment ventures.
The Relevance of Market Capitalization
Simply, market capitalization represents the market value a company’s outstanding shares. Essentially, the size of a company determines its asset allocation and risk return parameters for the stock mutual funds and stocks. This is fundamental since it helps the investment enthusiasts to determine the size of a business entity as contrasted to total asset figures or sales (Ranganatham 2004).
Jim’s portfolio consists of a diverse investment plan, with a keen interest on income-generation, security of the future for the undertaking and diversification. This is apparent in view of Jim’s stated purpose of his investment options and his careful review of the financial indicators: dividend yield, dividend cover, P/E ratio and market capitalization. Notably, Jim is performance-oriented and makes an effort to ensure the success of his undertakings. In the true spirit of an investor, he does not put all his eggs in one basket. He diversifies his investment ventures, not in the way of avoiding the risks but as a mechanism of cushioning his investments against devastating occurrences that may affect any of his undertakings. In short, Jim is an investor who is familiar with investment risks. He does freak out but rather secures each of his investments with others.
Risk-averse and Risk-seeking
Risk averse is a general description of an investor who would go for a low-risk investment opportunity. This happens when there are a number of options with the same expected return value. This term appears to be suitable to most investors in the business world. They assess the investment opportunities at their disposal and make a choice that is as risky as any other (Investopedia n.d.).
On the hand, risk-seeking is the tendency to give a blind eye to conspicuously risky opportunities (Risk-seeking 2013). Someone who loves taking risks is a risk-seeker. Gamblers, in most are the chief risk-seekers. In risk-seeking, someone would prefer a $100 opportunity with more than 50% risk to a sure chance of pocketing $50.
Attitude towards Risk
Jim is wary of the risks that come with any investment opportunity. He, nevertheless, shows little care about such a devastating investment ordeal as he proceeds with his plans, with clear objectives and the desire to succeed. The diversity of his investments and his commitment to his projects shows that, knowing the likely negative outcomes, he does what he can possibly do to avert chances of such incidents. He, like many other investors, understands the concept of investment risk and does not allow that to deter his progress.
Shares to Sell and those to Retain
Jim holds ordinary shares in public traded companies. His shares are in two categories: for earning dividends and those in companies for future expansion. The prudent decision for Jim is to dispose of the shares in companies with which he lacks a long term interest. The most opportune moment for such a move should be at the earliest moment he suspects a looming plunge in the companies’ dividend yield. On the hand, he ought to hold onto those shares in the companies with which he has a long-term interest.