Stocks

The largest stocks are sometimes classified as “megacaps,” companies with a market value of > $100 billion. The S&P 100 Stock Index is comprised of stocks whose average market capitalization is $114 billion (as of March 2012).

One way to determine sustainable growth for a stock is a measurement called “return on invested capital.” This measures whether companies are finding lucrative projects that can power future growth. Today, numbers in the 13-16% are considered ordinary, while those above 30% are excellent (e.g., Apple, Philip Morris International, and Priceline.com both have returns on invested capital of more than 40% as of March 2012).

The Dow was launched on May 26, 1896 as a “price-only” index that does not capture (include) the dividend income of the underlying companies. According to finance professor Statman of Santa Clara University, with dividends reinvested along the way, from its May 1896 inception to March 2012, the Dow would have closed at 1,339,411 (not 13,000). This number is more than 100 times a closing price of 13,000.

As of early 2012, Con Ed had single-digit sales growth and its common stock had 1/5th the volatility of the U.S. stock market. Over the past decade, Con Ed’s stock price only slightly outperformed inflation. However, with dividends reinvested, shares returned 128%, vs. a total return of 33% for the S&P 500. Co Ed has increased its dividend for 37 consecutive years. Over the past decade (2002-2011), Chevron returned almost 200% with dividends reinvested; Altria Group returned more than 300%.

A company’s P/E ratio is its stock price divided by a year’s worth of its per-share earnings. It is one measure of how much investors are paying for the value a company creates. The S&P 500’s P/E is useful for sizing up the broad market at a glance. 

Research published in 1998 by UC Berkeley showed that individual investors were 50% more likely to sell a winning stock than a loser. According to numerous academic studies, mutual fund managers who hold onto losing stocks underperform, on average, by four percentage points annually compared to those fund managers who cut their losses.

As of September 2012, the preferred stock market was valued at $500 billion. The yield of the S&P U.S. Preferred Stock Index was 6% versus ~2% for the S&P 500. These hybrid securities often have a call feature. Some preferreds can be converted to common stock. But just like common stocks, the dividend can be cut or cancelled without notice by the company’s board of directors. 

There is a perception that dividend-paying stocks are safer than the market as a whole; if stocks suffer a large loss, dividend payers will drop less. However, the 100 highest dividend-paying stocks in the Russell 1000 Index have a beta of 0.96, making their market-related risk almost the same as the S&P 500 (which always has a beta of 1.0).