Dividends Drive Stock Purchase

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Recently I decided to purchase a stock that was under $5 a share. These types of stocks are often referred to as “penny stocks” due to being below $5 a share. There are only a few penny stocks that are established, well run companies. Often the penny stocks are highly speculative gambles that make investors a lot of money or cause them to lose a lot of money. Often times stock websites will promote the penny stocks they own in an attempt to drive the price up, so they can sell their shares and make a lot of money.

The reason I was exploring a stock with a small price tag and a dividend was to examine dividend yield. The stock I ended up purchasing was Full Circle Capital Corporation or $FULL. An $0.80 dividend for every share, that cost me $3.55 seemed like a good investment. At that current rate the dividend yield for the stock [at my purchase price] was 22.5%.

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Often times individuals forget that dividends are another way individuals can earn money on a stock. Individuals can actually earn more through dividends over time than they might on an individual stock purchase.

Let’s examine how long it will take me to earn my money back from this purchase using the dividends. I purchased 8 shares of the stock at $3.55 per share, in addition to my $7.95 transaction fee. In total I spent $36.35 on this transaction. Each share nets me a $0.80 dividend each year. This totals to $6.40 in dividend earnings per year [assuming the dividend stays at its current yield]. That means in about 6 years, if I still own the stock I will have earned back my purchase price simply through dividends.

If my stock is above my cost basis of $4.55 per share [purchase price + fees / # of shares] after this six year period I could also earn additional revenue through selling the stock. However, once you factor in the fact that I have to pay $7.95 to sell my shares, the stock price should be above $5.55 for me to earn anything. This slow earning over time is ultimately why individual stock owners will usually spend their dividend earnings to buy more stock.

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