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The Financial Department is prepared to furnish information regarding standard investment securities, but cannot undertake to advise the purchase of any specific security. It will give to inquirers facts of record or information resulting from expert investigation, and a nominal charge of one dollar per inquiry will be made for this special service. All letters of inquiry should be addressed to THE OUTLOOK FINANCIAL DEPARTMENT, 381 Fourth Avenue, New York.
BONDS VERSUS STOCKS
S a general proposition common stocks yield the highest return of all investments; next come preferred stocks; bond yields are the lowest of any. This is another way of saying that bonds are the safest investments, that preferred stocks rank second in this respect, and common stocks last, for of course safety is usually in inverse ratio to the size of the yield. The fact that some common stocks are safer investments than some preferred stocks, or even bonds, and that some preferred stocks are safer than some bonds does not change the
general rule, and in our present discussion of bonds and stocks we are using only high-grade examples of each.
When a man is seeking investment for his money, the question he asks himself is, "What shall I buy?" In the security market three possibilities are open to him: common stocks, preferred stocks, and bonds. He must make a choice, and, with the thought in mind that a brief discussion of these three kinds of securities may prove helpful to those of our readers who have funds to invest, we shall attempt to set forth the main
Use this booklet-and
HEN you send for our monthly booklet of Investment Recommendations, you should feel assured that personal service is also available to you in the selection of sound investments.
The booklet lists and describes, every month, a large number of attractive bonds which we recommend for investment. If, in addition to the information which it gives, you desire more detailed explanation of our offerings, or if you wish other investment assistance, our representatives at any of our offices are prepared to serve you, either in person or by correspondence.
We shall be pleased to send you a copy of the current issue of Investment Recommendations, upon request to our nearest office.
characteristics of bonds and these two classes of stocks.
In favor of bonds is the fact that they are secured by definitely described property pledged for the payment of interest and principal. A bondholder is a creditor, a man who has loaned money, and in exchange has received from the borrower a promise backed by a pledge of property to guarantee that upon a certain date the face value of his loan will be repaid, and that in the meantime he will receive interest at a certain specified rate. He has no stake in the company's earnings other than that they be sufficient to pay him the interest due. If unexampled prosperity should fall to the company's lot, he does not share in it. He receives the same rate of interest he did when earnings were less. On the other hand, he need not worry greatly about periods of adversity. He receives the same rate of interest at such times too. And if interest is not paid, he can, in company with the holders of the same issue of bonds, take over the property pledged for their payment, have it sold, and share in the proceeds to an amount equal to the face value of his bond and the unpaid interest. In other words, a bond is a conservative investment in that it is not seriously affected by business fluctuations and variations in the size of the company's earnings. A bond is bought for the income it yields, and not for the sake of possible gain. A bond presents fewer elements of risk than stocks, and, this being the case, is the sort of an investment for the person of small means, who cannot afford to take chances with the little he has. High-grade bonds, further, are always acceptable as collateral in case the owner wishes to borrow on them, for they are not only good security, but are readily convertible into cash, as there is an excellent market for the best classes of bonds. During the past year or two the bond market, in fact, has been more active than the market for stocks, the demand for highgrade, non-speculative investments being unexampled.
There is always a brisk demand for the best preferred stocks too. Many preferred stocks are decidedly in the class of investment securities, and one advantage they have over bonds is that as a general rule their yield is higher. Another item in their favor is the fact that dividends are free of the normal income tax, and this circumstance further increases the net yield of stocks as compared with bonds. Stock dividends, however, as contrasted with bond interest are entirely dependent upon earnings. The first money a company earns over and above expenses must be used for the payment of interest on its obligations, and bonds are decidedly an obligation. Shares of stock, however, are more in the nature of participating certificates, entitling the holder to dividends, if earned, but not otherwise.
Preferred stocks are usually "preferred as to dividends and assets." That is to say, they are entitled to dividends before any distribution can be made on the common stock, and in case of a dis
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solution of the company the preferred stockholders would get their share of the assets after the fixed obligations have been discharged-before anything could be given to the holders of the common stock.
Dividends on preferred stocks are usually limited to a certain amount per share, just as bond interest is fixed and determined. Sometimes it is provided that after a certain percentage is paid on the preferred and a like amount on the common both classes shall share equally in. any further distribution. This, however, is rather the exception than the rule.
In many instances, the amount of dividends a preferred issue can receive being limited, the common stock dividends are considerably higher, for dividends on common stocks are not limited at all, and if earnings are high enough the common may pay two or three times as much as the preferred. In the case of one of our large railway systems, for instance, the preferred stock pays $4 a share a year and the common $10. It should be borne in mind, however, that common stocks are almost entirely dependent for their value upon earnings, and, as business conditions change, earnings are bound to fluctuate and the size of the dividends vary. It being the case that earnings are liable to fluctuate and that the security for stocks are dividends, stocks are speculative, their value varying with the size of earnings. Uncertainty is what makes an investment speculative, and no one can with certainty predict or foresee the size of earnings. Companies with established businesses are almost certain to earn something on their capitalization. Bond interest being a charge on these earnings ahead of dividends, interest is more of a certainty than dividends. Preferred dividends having a claim on earnings prior to common dividends, preferred stocks are surer of paying their dividends than are common stocks, so that common stocks rank last and the element of uncertainty is greatest in their
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Suppose a corporation has outstanding $10,000,000 of 5 per cent bonds, $3,000,000 of 7 per cent preferred stock, and $7,000,000 of common. If net earnings amount to $2,000,000 a year, it will be applied as follows: $500,000 for interest on the bond issue and $210,000 for the preferred stock dividend, leaving $1,290,000 of earnings on the common, or at the rate of over $18 a share. However, it is probable that a considerable portion of the $18 will be held in the treasury. In this case the common stock would seem to be a more attractive investment than either the bonds or the preferred stock. But suppose a bad year comes along and earnings fall to $1,000,000. What happens then? Well $500,000 is used for interest on the bonds, $210,000 for the preferred dividends, and the balance, amounting to the equivalent of a little over 4 per cent, will probably be kept in the treasury and no disburse
ment made on the common. The common in this case will not be considered as attractive an investment as formerly, and its price will drop tremendously. Suppose a still worse year ensues and earnings are only $600,000. Interest on the bonds will be paid, but nothing on the preferred or common stocks. If earnings were only $400,000, interest would probably still be paid on the bonds, the deficit made up by dipping into the treasury, but the two classes of stocks would of course again be ignored.
It is possibilities such as these that make bonds the best investments, that cause preferred stocks to rank second and common stocks last. And every investor in making up his mind about what to buy should remember that it is wise to consider the possibility of adversity as well as prosperity.
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How Disobedience Gave Way to a Tug at the Heart-Strings
HAS your child ever looked
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I Learn this Secret
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