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+--- Thread: DGI relationship with Valuation (/showthread.php?tid=1477)
DGI relationship with Valuation - notexactly - 02-08-2016
I wanted to start a discussion on something I've been thinking about for the past month.
Dividend Growth Investing, for many of us, is income investing. We don't rate our portfolio on it's day to day value, we rate our portfolio based on the income it generates and the increase of that income.
Let's take MCD for example. I have attached two screenshots. If we open the first one, we see MCD has a P/E ratio of 23 currently. For our purposes, let's assume P/E is the only way we value a company. A large amount of DGI have general rules such as, P/E must be under 15 or under 20, etc.
If a DGI investor with this outlook encountered MCD, they would not invest and wait for MCD to be less overvalued.
MCD at a P/E of 18 and MCD at a P/E of 23, strictly from a valuation standpoint, does it make a difference to the dividend growth investor?
Yield seems to be the most persuasive metric in this puzzle. If MCD went down in price to have a P/E of 18, it would have a higher starting yield than the MCD of today with P/E of 23. This matters to the dividend growth investor.
The second screenshot shows MCD's yield over time. The lower the P/E, usually the higher the yield, and vice versa.
Assuming the investor accepts the yield at the P/E ratio of 23, what are the risks of purchasing a dividend paying stock when it has a slightly higher P/E ratio or when it is overvalued?
The reason I posted this thread expressing my thoughts, was to start a conversation I could learn from. I would love to hear everyone's input, feel free to let me know if I'm completely wrong or have missed something.
RE: DGI relationship with Valuation - cannew - 02-08-2016
Valuation matters, but it's up to you to decide what to use as the measurement. I personally use a companies Average Yield (determined over a 10 yr to 15 yr period) and compare current yield to the average. If it's close or higher than the average I consider adding to the position (at least I used to when I was accumulating). I also used to compare current yield to my Average Yield of the stock. Again the idea was to increase my average yield.
RE: DGI relationship with Valuation - EricL - 02-09-2016
I don't have time for an extensive comment right now, but when you overpay for stocks you are also undercutting your yield since dividend yield is a function of price. If you overpay by 20% on a company, you are permanently dropping your future income by 20% as well.
RE: DGI relationship with Valuation - DividendGarden - 02-09-2016
(02-09-2016, 11:04 AM)EricL Wrote: I don't have time for an extensive comment right now, but when you overpay for stocks you are also undercutting your yield since dividend yield is a function of price. If you overpay by 20% on a company, you are permanently dropping your future income by 20% as well.
Agree with EricL. If MCD is overvalued at the time, find something else that is undervalued and watch MCD. Usually, you'll get your price if you are patient enough. For me, valuation trumps yield.
RE: DGI relationship with Valuation - KenBob - 02-09-2016
About a year ago, I took my watchlist and developed a subset with a forward PE ratio below the list's average. Comparing the subset's average yield to the overall list's average yield, the subset had a noticeably higher yield.
RE: DGI relationship with Valuation - DividendGarden - 02-10-2016
(02-09-2016, 07:48 PM)KenBob Wrote: About a year ago, I took my watchlist and developed a subset with a forward PE ratio below the list's average. Comparing the subset's average yield to the overall list's average yield, the subset had a noticeably higher yield.
That makes sense, lower earnings multiple implies a lower yield. I don't know how much I trust forward P/E, though.
RE: DGI relationship with Valuation - divmenow - 02-10-2016
(02-10-2016, 10:33 AM)DividendGarden Wrote:(02-09-2016, 07:48 PM)KenBob Wrote: About a year ago, I took my watchlist and developed a subset with a forward PE ratio below the list's average. Comparing the subset's average yield to the overall list's average yield, the subset had a noticeably higher yield.
That makes sense, lower earnings multiple implies a lower yield. I don't know how much I trust forward P/E, though.
Me personally would not buy MCD here. You missed you chance last year when everyone hated it under $90. Now it seems everyone loves it on wallstreet and it cant do no wrong. 24 hr breakfast was a good idea but how much longer can exist?
RE: DGI relationship with Valuation - NilesMike - 02-10-2016
(02-08-2016, 08:06 PM)cannew Wrote: Valuation matters, but it's up to you to decide what to use as the measurement. I personally use a companies Average Yield (determined over a 10 yr to 15 yr period) and compare current yield to the average. If it's close or higher than the average I consider adding to the position (at least I used to when I was accumulating). I also used to compare current yield to my Average Yield of the stock. Again the idea was to increase my average yield.
I do similarly. I look at the dividend yield range for companies that I like, when they are at the upper end of the yield range, I buy.
RE: DGI relationship with Valuation - rayray - 02-25-2016
When looking at Forward and Trailing P/E's those are just good starting points and easy ways to decide if doing further research is worth your time and effort. Nothing is quicker then glancing at P/E's to weed out companies, imho.
There are always good investments to make in any market environment, sometimes it just takes a little more discipline. Heck, right now there are some great buys but right here right now I'm in a somewhat cash accumulation phase to get a 3 to 5% percent allocation of my brokerage/roth accounts. There's no reason other then that's the investment phase I'm personally focusing on; in other words, it has nothing to do with what the market is doing at the moment.