With lots of sophisticated investors poring over the market though, not everything that looks like a bargain may in fact be one.
It could be, for example, that some UK shares are cheap precisely because their long-term prospects seem less attractive now than they did before.
Even if I earn juicy dividends, I could lose money if the value of my portfolio falls.
Buying into Direct Line for its handsome shareholder payout five years ago, for example, I would now be earning no dividends. They have been cancelled. To boot, my shareholding would be worth 43% less than I paid for it.
So when looking for shares to buy, my focus is on finding companies with promising long-term commercial prospects and a share price I think significantly undervalues them.
Key Points A dividend yield is an expression of a company’s dividend expressed as a percentage of its stock price. Stocks with a higher yield become attractive because these stocks increase the payout you receive for the same amount of money invested. Many analysts suggest that a good dividend yield is a yield that is higher than a corresponding index. Dividend yield is frequently the first metric you will use when considering buying one or more dividend stocks.
A common strategy for investors interested in maximizing the benefits of dividend stocks is to buy the dividend stocks that return the highest yield.
In many cases, dividends with a high yield equate to financially stable companies with the ability and willingness to increase their dividend over time. These companies typically have strong balance sheets that hold up in both good and bad financial conditions. That stability means the companies are more likely to maintain or increase their dividend over time. Companies that have increased their dividends the most are known as Dividend Aristocrats or Dividend Kings.
However, there are exceptions to this theory, which is why it’s important to understand the factors that go into a dividend yield. This article will review the significance of a stock’s dividend yield for investors.
What is Dividend Yield? A dividend yield is an expression of a company’s dividend expressed as a percentage of its stock price. The formula for calculating dividend yield is:
Dividend yield = Current annual dividend (per share)/Current stock price
Let’s look at two examples:
Verizon Communications Inc. (NYSE: VZ) pays an annual dividend of $2.61 per share. If Verizon’s stock price is $35.48 on the day it declares its dividend (the declaration date) you could calculate the dividend yield would as follows:
2.61/35.48 = 0.07356 or 7.36%
Procter & Gamble Co. (NYSE: PG) pays an annual dividend of $3.76. The PG stock share price on the declaration date is $145.06. The dividend yield is:
3.76/145.06 = 0.0259 or 2.59%
Now, let’s look at what that would mean if you bought $5,000 of each company’s stock.
If you bought $5,000 of VZ stock at $35.48 per share, you would own 140.9 shares. Since Verizon pays its dividend quarterly, you would receive $0.6525 per share (2.61/4). Your payout would be:
140.9 x 0.6525 = 91.94
That means you would receive $91.94 as a cash payout or to reinvest in VZ stock.
Now let’s look at Procter & Gamble. If you bought $5,000 of PG stock at $145.06, you would own 34.4 shares of PG stock. Procter & Gamble also pays its dividend quarterly, so you would receive 0.94 per share (3.76/4) for every share you owned. Your payout would be:
34.4 x 0.94 = 32.34
That means you would receive $32.34 as a cash payout or to reinvest in PG stock.
Benefits of Dividend Yield Income-oriented investors choose dividend stocks because they are counting on the income they receive from dividends to supplement their retirement savings. Therefore, stocks with a higher yield become attractive because, for the same amount of money invested, these stocks increase the payout you receive.
If you don’t need the income for immediate expenses, a major benefit of owning dividend stocks is the benefit of compounding. You receive this benefit by reinvesting your dividends into a dividend reinvestment plan (DRIP). Because dividends pay out on a regular schedule, usually quarterly, you’ll continue to buy shares regularly.
This, in turn, allows you to buy more or fractional shares, which increases the size of your next payout. Over time this is a proven way to build wealth over time.
What is a Good Dividend Yield? What constitutes a good dividend yield will depend on many factors. However, many analysts suggest that a good dividend yield is a yield that is higher than a corresponding index.
For example, as of March 31, 2023, the average dividend yield of stocks included in the S&P 500 Index was 1.66%. However, historically, the index has had an average yield between 3% and 5%, so any stock with a dividend yield within that range is said to be a high-yielding dividend stock.
How to Evaluate Dividend Yield Because dividend yield is based on the company’s current stock price, it will change daily and even several times throughout a trading session. This makes it an imperfect standalone metric for evaluating dividend stocks.
Therefore, investors need other ways to evaluate if a company’s dividend yield is a green light or a caution signal. Here are some factors to consider when evaluating a dividend yield.
Consider the Yield to Other Stocks in the Company’s Sector When many investors think about dividend stocks, they may think about the blue-chip stocks their grandparents or parents owned. These companies, such as The Coca-Cola Company (NYSE: KO), grow consistently over time. Still, the real benefit to owning these stocks is the ability to collect a regular dividend over time. That’s one reason Warren Buffett likes KO stock.
However, Mr. Buffett also has an affinity for Apple Inc. (NASDAQ: AAPL). The tech giant is the definition of a growth stock consistently using its profits to branch into new areas. However, it also generates so much cash that it does manage to pay a small dividend.
Is the Dividend Sustainable? Many dividend investors have suffered hefty losses after falling into a yield trap, which occurs when the company has an appealing dividend yield not supported with a strong balance sheet. That’s why investors must perform some basic fundamental analysis to understand how healthy a company is.
Are they growing earnings? Do they carry too much debt? Some companies can get away with borrowing money to pay a dividend. But over time, that’s not a sustainable strategy.
Look at the Company’s Dividend Payout Ratio Next to dividend yield, a company’s dividend payout ratio (DPR) is probably the second most important metric to consider. The DPR measures how much profit a company uses to pay its dividend measured as a percentage. Any number above 60% is generally considered unsustainable, but that is sector and company-specific. For example, real estate investment trusts (REITs) and master limited partnerships (MLPs) must pay at least 90% of their profits through dividends.
Look For a History of Increasing Dividends The best dividend stocks are companies with a proven history of increasing their dividends over time. The best of the best are considered dividend aristocrats and dividend kings. These companies have increased their dividends for at least 25 and 50 consecutive years, respectively. While past increases do not guarantee future increases, companies that commit dividend increases will tend to prioritize the dividend because they know that investors see it as a compelling reason to own the stock.
Dividend Yield isn’t Perfect, but it’s a Good Start One of the many benefits of dividend investing is the annual dividend yield, typically paid out quarterly. For income-oriented investors, reliable and predictable regular income from dividends can make a difference in the quality of life in their retirement.
The dividend yield formula is: Dividend yield = Current annual dividend (per share)/Current stock price
So, a company that pays a total annual dividend of 80 cents per share with a stock price of $20 will have a dividend yield of 4%. Although there is no perfect answer to “What is considered an acceptable dividend yield?” most investors consider a 3%-4% annual dividend yield a good target, particularly if they plan to reinvest their dividends.
A limitation of using the dividend yield as a metric for investors is that it can misrepresent a company’s financial health based on its stock price. For example, a company with increased revenue and earnings per share that falls short of analysts’ recommendations may see its stock price —and therefore its dividend yield — decline even though they are operating a healthy business. Conversely, there are times when a company may proactively announce a reduction in its dividend to take care of some pressing financial issues. However, if analysts perceive this action as one that can help the company’s long-term health, they may increase its stock price.
One of the best Traders around is the Naked Trader, now u could splash out on a course or buy his book, he has several to choose from and re-invest the saved cash in the market.
It’s very difficult to copy trade his share picks as he doesn’t update regularly.
The last post on trading now it’s back to the knitting.
There are two emotions in the market fear and greed, the problem is we hope when we should fear and fear when we should hope.
William J O’Neil
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We hope that the market will rescue us from a poor trade and fear that the market will take back all of our profit. I started trading dividend Investment Trusts because my stop loss policy wasn’t resolute enough.
The Ichimoku chart was developed by Goichi Hosoda under the pseudonym Ichimoku Sanjin before World War II. Ichimoku charts are a trend-following system with an indicator similar to moving averages. The chart consists of five lines using data taken from the mid points of historical highs and lows in various ways to create a panoramic view of price movement.
The KISS strategy is if the price is above the cloud the sun is shining, below it’s raining on your parade.
Nothing works all the time, otherwise there would be no markets.
Darvas box theory, developed by Nicolas Darvas, is a momentum strategy that combines market momentum theory with technical analysis to determine optimal entry and exit points in the stock market. Let’s delve into the details:
What Is Darvas Box Theory ?
Darvas box theory targets stocks using highs and volume as key indicators. The technique involves: Buying stocks that are trading at new highs. Drawing a box around the recent highs and lows to establish an entry point and placement of the stop-loss order. A stock is considered to be in a Darvas box when the price action: Rises above the previous high. Falls back to a price not far from that high.
How Does It Work? Darvas boxes are created by drawing a line along the recent highs and recent lows of the time period the trader is using. The theory works best in a rising market and/or by targeting bullish sectors. Traders focus on growth industries that are expected to outperform the overall market. Darvas used volume as the main indication for strong moves. Once an unusual volume is noticed, a Darvas box is created: The box has a narrow price range based on recent highs and lows. Inside the box, the stock’s low represents the floor, and the highs create the ceiling. When the stock breaks through the ceiling of the current box, traders: Buy the stock. Use the ceiling of the breached box as the stop-loss for the position. As more boxes are breached, traders can add to the trade and adjust stop-loss orders.
Fundamental Analysis in Darvas Box Theory: While largely technical, Darvas box theory originally mixed in some fundamental analysis: Targeting industries with the greatest potential for exciting investors and consumers with revolutionary products. Preferring companies with strong earnings, especially during choppy market conditions. In summary, Darvas box theory is a powerful tool for traders seeking momentum-based entry and exit points, especially in rising markets and bullish sectors.
Co pilot
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Always allow some wiggle room, look at support and resistance as an area not a strict level as u may be whipsawed.
This will not be a portfolio constituent in the foreseeable future. I think most of us recognise Technology advances are going to continue. ATT is a quasi tracker in that if u buy and can choose when to sell, it could be multi years, u will print a profit. No dividends so a trading share only. The graph shows a Darvas box, just watch to see which it breaks and hope u don’t get whipsawed.
The long term chart, if u had bought at the end of the dotcom boom it would have been 16 years before u were in profit. Note how the market always rises just enough to make u hope u will get back your losses if u wait it out. Which of course u did but it was a long wait.
Trading is simple but not easy. Warren Buffett
If your opinion was the dependence on Technology would increase, u could have added to your position, one of the very Trusts I would recommend doing so without a dividend, in case u are wrong, again.
On 15 March 2021, Allianz Technology Trust PLC (the ” Company “) published its annual report setting out its intentions to undertake a sub-division (the ” Sub-division “) of each of the Company’s ordinary shares of 25p each (the ” Existing Ordinary Shares “) into 10 ordinary shares of 2.5p each (the ” New Ordinary Shares “)
Companies sometimes sub divide their shares when the price rises similar to PCT as the view is private investors, unlike in America don’t like buying high priced shares.
Private Investors having earned profits with the share, hold hoping that the share price will rise, in time, to a similar price but instead of having one share they will have ten. A portfolio maker.
My investment pot has swelled to £46,100 in eight years – have I dug myself into a capital gains tax trap?
Story by Harvey Dorset
I’ve been making regular monthly investment contributions and reinvesting the dividends.
I have paid £300 in each month for the past 97 months, and in doing so have accumulated £46,100 from a total investment of £29,100 plus the dividends that I have reinvested.
How can I calculate capital gains tax on this investment, and have I dug myself into a tax trap?
Please remember at all times the blog is about sensible investing, trading the plan as a long term buy and hold portfolio. Like today if there is an opportunity to book a ‘profit’ I will but only for re-investment in the portfolio.
It’s a waste of my time re-inventing the wheel so below is the warning from the Naked Trader blog.
COPYING TRADES: I can’t stop you from copying a trade I made but remember the price may already be a lot higher than I paid indeed I hope it is as buying at good prices is what I do for a living. You may be buying at the top and could easily lose money. Also I can make terrible mistakes and have done in the past. I could also sell before you or before the share tanks. I may still be holding in a year when you sold at a loss. Always do your own research, don’t jump in blindly. Market makers are very clever at knowing how to make you pay top dollar and then push you out at a loss. This site is about sensible investment and learning how to trade sensibly and is not a tipping site. Beware.
Never push buy on anything till you’ve done proper research and got yourself a sensible price.
