Page 427 - How to Make Money in Stocks Trilogy

Money Management 297

If you do buy income stocks, never strain to buy the highest dividend
yield available. That will typically entail much greater risk and lower quality.
Trying to get an extra 2% or 3% yield can significantly expose your capital to
larger losses. That’s what a lot of Wall Street firms did in the real estate bub-
ble, and look what happened to their investments. A company can also cut
its dividends if its earnings per share are not adequately covering those pay-
outs, leaving you without the income you expected to receive. This too has
happened.
If you need income, my advice is to concentrate on the very best-quality
stocks and simply withdraw 6% of your investments each year for living
1
expenses. You could sell off a few shares and withdraw 1 ⁄2% per quarter.
Higher rates of withdrawal are not usually advisable, since in time they
might lead to some depletion of your principal.

What Are Warrants, and Are They Safe Investments?
Warrants are an investment vehicle that allows you to purchase a specific
amount of stock at a specific price. Sometimes warrants are good for a cer-
tain period of time, but it’s common for them not to have time limits. Many
of them are cheap in price and therefore seem appealing.
However, most investors should shy away from low-priced warrants. This
is another complex, specialized field that sounds fine in concept but that few
investors truly understand. The real question comes down to whether the
common stock is correct to buy. Most investors will be better off if they for-
get the field of warrants.

Should You Invest in Merger Candidates?

Merger candidates can often behave erratically, so I don’t recommend
investing in them. Some merger candidates run up substantially in price on
rumors of a possible sale, only to have the price drop suddenly when a
potential deal falls through or other unforeseen circumstances occur. In
other words, this can be a risky, volatile business, and it should generally be
left to experienced professionals who specialize in this field. It is usually bet-
ter to buy sound companies, based on your basic CAN SLIM evaluation,
than to try to guess whether a company will be sold or merged with another.

Should You Buy Foreign Stocks?
Yes, the best foreign stocks have excellent potential when bought at the
right time and right place, but I don’t suggest that you get heavily invested