Stock Portfolio Strategies
A stock portfolio strategy is based on the investor's goal. There are several profitable ways to invest in stocks, each geared to a specific goal. For a stock portfolio strategy to be successful, it must focus on that goal, or strategy, and not mix and match different styles or approaches.
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Equity Income
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Many stocks pay dividends, with the dividend yield typically ranging from 1 to 6 percent depending on the company, sector, industry and prevailing market conditions, although under some unusual conditions, dividend yield can be 10 percent or higher. But the most valuable feature of dividend income is not its current yield but its growth. Some companies increase dividends over time, with the rate of increase exceeding inflation. Rising dividends make stocks more valuable to investors, so they rise in price. Shareholders in companies with regular substantial dividend increases in effect own an appreciating asset that produces a rising income stream that beats inflation. Equity income investing focuses on stocks that pay reasonable but rising dividends that are secure (can continue in the future).
Capital Appreciation
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Capital appreciation means that an investor's capital increases over time; current income is of little or no consideration. Capital appreciation is achieved through stock price growth: an investor buys a stock for $20 and sells it later for $40. The two most common capital appreciation strategies are growth and value. Growth focuses on companies that are fast growers (grow their sales and earnings faster than most); value focuses on companies that are undervalued relative to the market, their peers, or their own historical averages.
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Active Stock Trading
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Profits in stock trading come from capital gains, or realized share price increases, so stock trading is similar to investing for growth. But unlike growth investors, who may hold unrealized gains for years, active stock traders take their profits regularly, sometimes even daily (day traders). Close to 100 percent of active stock trading gains are short-term, so stock trading generates current income for stock traders, and many full-time stock traders live off that income.
Preservation of Capital
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Investors with substantial portfolios may be more focused on preserving the purchasing power of the assets they already have than on trying to make more money. They may focus on large blue chip companies that may not grow fast or pay high dividends but whose stock prices are stable and slowly rising, representing a good storage of value and protection against inflation.
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