Here is an unusually good saving plan--a form of investment that has
the triple advantage of furnishing (1) good dividend-earning security,
(2) possibility of material increase, and (3) fixed obligation to pay
on certain due dates, which acts as a disciplinary saving system.
The difference between a preferred and a common stock is that the
interest charges on the former, while not guaranteed, will be paid
at the named rate before the common issue can secure any part of the
profits. The only disadvantage is that a dividend on a preferred stock
is limited to a stated amount, while over a period of years the common
stockholders of a sound company may expect not only to get a rise in
dividends rate, but possibly also stock dividends or “split-ups,” and
also a general increase in quoted value. There are economists today
who contend that the soundest, surest way to let your money’s value
grow with the country is to invest in the common stocks of very sound
concerns, the leaders in their field.
It is true there is always an element of speculation in buying common
or preferred stocks, and a good deal of shrewd discrimination is
desirable in purchasing either preferred or common stocks. It is best
to deal only in stocks listed on the New York Stock Exchange, or the
soundest local stocks.
As in good bonds, present earnings or recent happenings may often
be ignored for the general purpose of making investment in a good
preferred or common stock. Seasoned reliability over a period of time,
over lean and fat periods of business, the ability of a corporation to
earn and pay its preferred dividend, should be the only consideration
influencing a purchase.
If, in addition, the corporation has only a moderate funded debt and
the preferred issue is followed by a substantial common stock issue
upon which dividends have been paid or are in prospect, the preferred
issue is entitled to the rating “high grade,” and the investor should
buy it, if the yield is six per cent or over.
A very high or extraordinary yield on a preferred stock means either
(a) that it has escaped the notice of the rank and file, such cases
being rare but not impossible; or (b) its industry is speculative, as,
for example, mining or oil.
The case of common stocks is more risky, and these should be bought
on installments only if they represent a 20% portion of a diversified
list which includes bonds or good preferred stocks. The common stock of
some of our greatest corporations has been available to wise purchasers
and saving investors at ridiculously low prices. Frank Munsey is
reputed to have purchased U. S. Steel Common at about 33. Today it has
advanced 100 points beyond that. In fact there was a period when it was
considered worth little; it was contemptuously regarded as “water.” The
same is true of Woolworth Five and Ten Cent Store common stock--and
many others. Even a common stock which has heavy tangible assets behind
it, like U. S. Rubber, has been as low as 28 within a year of the time
that it reached 97. Common stocks of sound, well managed companies,
especially those whose trade-marks are familiar “household words,”
well advertised, are a very good purchase for the saving man. This is
being more and more appreciated, for stocks of famous companies are now
owned by hundreds of thousands of ordinary investors and savers where
once they were owned only by a few hundred people. _The ordinary
man today, the man with only $500 or less, can share in the success
and profits of prominent business institutions, at precisely the same
ratio as the large owners and wealthy men._ There are 14,500,000
stockholders in corporations today; and dividend and interest
disbursements in January, 1926, amounted to the huge total of 5½
billion dollars.
Good bankers and banks will gladly arrange for the purchase of listed
high grade preferred and common stocks on time payments; and the
regular arrival of payment dates will be an excellent prod to saving,
just as insurance is such a popular prod already. Installment purchase
of merchandise is on a very large scale today (about 10 billion
dollars in 1925), and the time payments for perishable goods could far
more wisely be used to buy investments, which do not depreciate, but
actually yield interest, and if carefully picked grow in quoted price.