Advanced Diploma of Financial Planning (ADFP) Practice Test

In terms of stock market positions, what is a common strategy for earning income?

1. Taking short positions only

2. Investing solely in growth stocks

3. Relying on dividend yield from long positions

4. Buying only value stocks

The correct answer is: Relying on dividend yield from long positions

Relying on dividend yield from long positions is a common strategy for earning income in the stock market. This approach involves purchasing shares of companies that regularly distribute a portion of their earnings back to shareholders in the form of dividends. Investors who seek income often favor stocks known for their stable and consistent dividend payments, as these provide a reliable source of cash flow, independent of the stock's price fluctuations. This strategy is particularly attractive to income-focused investors, such as retirees, who may depend on this income stream for their living expenses. Moreover, dividend-paying stocks can also offer potential for capital appreciation, thus providing a combination of income and growth potential. In contrast, taking short positions involves betting against a stock's performance, which typically does not generate income but rather aims to profit from price declines. Investing solely in growth stocks focuses primarily on capital appreciation without necessarily providing any income, as these companies often reinvest their earnings rather than paying dividends. Finally, buying only value stocks revolves around undervalued companies with potential for price growth and may or may not include dividend payments, depending on the company's policy.