08-24-2014, 11:20 AM
I want a good company with a good dividend at a good price.
For a good company, I concentrate on blue chip companies with a well known and proven business model.
For a good dividend, I am looking at how the dividend yield compares to the corporate bond yield minus inflation, the payout ratio must be less than 80%, and the expected earnings growth rate must be greater than the inflation rate. Earnings growth should be roughly proportional to dividend growth.
For a good price, a sound valuation technique is required, so stocks can be bought at or below fair value. I have gone back and forth on what is a good valuation model. I now use a market forward PE ratio which is essentially the inverse of the investment grade corporate bond index yield plus an equity premium. Of all the methods I have looked at, this method appears to have the best correlation with actual stock prices.
I believe that the history of a company is good as a qualitative parameter, but can't be used to predict quantitative performance; therefore, history is good for looking for finding a good company, but not much else. Otherwise, I am relying upon Wall Street estimates for forward earnings and earnings growth. As a nonprofessional, I simply don't have time to go deeply into the books and to research all the moves of a company.
For a good company, I concentrate on blue chip companies with a well known and proven business model.
For a good dividend, I am looking at how the dividend yield compares to the corporate bond yield minus inflation, the payout ratio must be less than 80%, and the expected earnings growth rate must be greater than the inflation rate. Earnings growth should be roughly proportional to dividend growth.
For a good price, a sound valuation technique is required, so stocks can be bought at or below fair value. I have gone back and forth on what is a good valuation model. I now use a market forward PE ratio which is essentially the inverse of the investment grade corporate bond index yield plus an equity premium. Of all the methods I have looked at, this method appears to have the best correlation with actual stock prices.
I believe that the history of a company is good as a qualitative parameter, but can't be used to predict quantitative performance; therefore, history is good for looking for finding a good company, but not much else. Otherwise, I am relying upon Wall Street estimates for forward earnings and earnings growth. As a nonprofessional, I simply don't have time to go deeply into the books and to research all the moves of a company.