Part II ... "Dividends Still Don't Lie" by Kelley Wright
Last week I told of an investing strategy explained in Wright's book. It had to deal with monitoring the yield.
Wright believes that when investing in dividend growth stocks, people judge value using the incorrect criteria.
I think it was Oscar Wilde that said ... "Nowadays people know the price of everything and the value of nothing."
General consensus is that you value a stock using PE which then provides a price that tells you whether a stock is over or under valued. Wright says this is wrong when investing in dividend growth stocks. He says what makes these types of stocks valuable is their dividend!
Therefore, Wright suggests that you monitor the historical yield for each company to decide when a stock is over or under valued.
He says to use at least 15-25 years of data to understand if a company is committed to paying dividends. In looking at a 15 year chart, he says to identify the high and low price extremes. Take the extreme price highs and determine a price average where share price seems to pull back. When undervalued, you need to determine the average of the extreme price lows. Then you determine the yield for both the high and low.
This will give you a price range or trading range where you can determine where a company may be overbought or oversold.
Wright goes on to say that we should only invest in the blue chip stocks for dividend growth. Of 15,000 stocks in the market, he says there are only 350 blue chip companies. Of those, he says only 272 have a dividend history worth noting and considered for purchase, provided we're in the range current price happens to be.
I don't have to do the work. Wright has done it for us. He lists those yields for all 272 blue chip companies in his latest book. The information is up to September 2009, so it's just over a year old.
I'll list some of the companies here, the ones I know others on this message board either own or are considering.
Stock ... Yld UV ... YLD OV
ABT ..... 3.0% .... 1.4%
MO ..... 5.0% .... 3.0%
CVX ..... 3.5% .... 2.0%
CLX ..... 2.8% .... 1.3%
KO ..... 3.0% .... 0.8%
CL ..... 2.4% .... 1.1%
COP ..... 3.8% .... 1.9%
EXC ..... 4.6% .... 2.1%
JNJ ..... 3.5% .... 1.8%
KMB ..... 3.6% .... 1.7%
MCD ..... 3.6% .... 2.0%
PEP ..... 2.2% .... 1.2%
PG ..... 2.5% .... 1.2%
SYY ..... 2.0% .... 0.7%
VFC ..... 3.6% .... 1.8%
So, in looking at MCD, for example, with a yield of 3.6%, MCD has been historically undervalued. It's current yield is 3.1% and would qualify as an under valued dividend growth stock.
Wright went on to say that MCD was undervalued at $14 when he bought and it was undervalued at $19 when he added and he said it was still undervalued at $56 when he published his book. ... MCD would be overvalued when the yield got to 2.0% and at that point, he would sell and take his profits. |
