It’s always best to make your money work for you, and interest rates are a phenomenal way to do that. Afterall, they don’t call compounded interest the 8th Wonder of the World for nothing.

But stocks that pay dividends are even better way for you to make money without doing anything, aside from saving your money and investing.

Long-term stock ownership is very profitable, because in the eyes of the corporation you’ve invested in, you are actually an owner. Whether it’s one share, 1% or 51%, you are an owner. Why would anyone want to own their own business? To make money.

But the glory of stock ownership is that you do absolutely nothing except purchase some shares. You’re not part of management, and you’re probably not the C.E.O. The downside to this is the risk - better hope they don’t butch or you’re gonna lose some money!

So how do you calculate the return on stocks? Say for example General Electric (NSYE: GE), who have been paying dividends since 1899, has a dividend yield of 4.17% (as of Aug. 11th, 2008).

What does this mean?

Well, let’s examine some facts first.

1) GE’s declared dividend (the amount of money they pay shareholders per share) is $0.31

2) They pay dividends quarterly (four times a year), and

3) Their stock price closed at $29.74/sh. on August 11th, 2008.

Their dividend yield is calculated as follows:

($.31/sh. x 4) = $1.24/year

You then divide the amount of dividends you would make off of one share of stock for one year, $1.24, by the closing stock price:

$1.24/$29.74 = .04169%

4.17% !! Currently, the highest interest rates have to offer are 3.30% (E*Trade) to 3.5% (HSBC).

There is way less risk involved in just stashing your money in a savings account, hence the lower interest rate.

Wanna know more?

Check out our investing section for articles on calculating the risk of stocks, overall stock return and the advantages of dividend-paying stocks over non-dividend paying stocks.

E-mail me with questions, comments or insight. I’d love to hear from you.

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