02-08-2016, 07:41 PM
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.
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.