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Barrons - "Speaking of Dividends"
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I've been wrestling with buying dividends at a good price. Assuming globalization will go forward and future inflation could become pretty high, how do we set a fair price? I've just started using this web site and using the screens available. Screens I've run thus far do not result in a reason to buy anything, because the stocks are over priced by historical standards, even in this so called market under duress.
Therefore, how do we get a handle on the macro economic changes underway? I firmly beleive in the future any good business that produces something or a service will be valued and a hedge against inflation Therefore the real question is how do we determine a good entry price if the future is PE infaltion. History provides context, but it does not appear to be a great guide, unless one buys into staying out of the market completely. Of course staying out of the market kis not an option, since nothing has any acceptable rate of return. Future inflation will arrive even if it may be off in the future for a while.
Thoughts
Wolf
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Rank: Advanced Member
Posts: 16
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Wolf...
One of your questions had to do with how to determine a good price to pay for a stock. I put a lot of faith in the PEG ratio to determine the fair value of a company. (Projected PE / 5 Year Projected Growth Rate) The result isn't related to the historical PE, which I agree is sometimes misleading. I base the future growth on the historical growth--and compare my estimate to the analysts estimate (ACE) from various websites--MSN, Yahoo, etc. Normally I make sure the estimated growth I use is at least 1-2% below the ACE. BTW, I don't use the estimates from Value Line. They don't make sense to me--just a personal thing.
Since I'm the one to set the future growth rate, I feel comfortable with the PEG ratio. I never buy when it's 1.5 or more, and if in the area of 1.2 or 1.3, want to see "railroad tracks", and increasing growth, when looking at Sales and EPS growth over the past 5 years.
Bob
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Bob,
Thanks I've used the PEG in the past but your limits are tighter. My previous was below and up to 2. Given the climate we are in future expanding growth with a more conservative multiple than I was using is probably a good way to go.
I'm getting back into investing and given the macro economic climate and globalization I have my doubts about how good historic trends are.
Wolf
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Rank: Advanced Member
Posts: 16
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More knowledgeable folks than I have set the top end of the PEG ratio at 1.5, but I agree with that top. Pushing it out to a 2 seems like over paying too much. I certainly agree we need to question the historic trends. The market over the last few years has been anything but normal. For the first time the S&P 500 has declined over two decades--2008 and 2009.
Bob
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Rank: Advanced Member
Posts: 262
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Bob do you mean since 1988 and 1989, or did you mean two years?
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Rank: Advanced Member
Posts: 16
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I meant beginning with each of those years and the preceding 10 years in each case. IOW 1989-2008 and 1990-2009. Those decades are the first in which an investment in the S&P 500 on January 1st of the decade and sold on December 31st the investor would have lost money.
There is a study done by Merril Lynch which shows the importance of investing long term by observing what would have happened if the investment was made for 1 year -- You would have lost money 17% of the time. Spreading that time period out to 10 years, you'd have never lost money in the S&P 500--until the two decades beginning in 1989 and 1990.
If anyone is interested in seeing the results of that study in graphic form, send me an email: bob.at.seattle@gmail.com.
Bob
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Rank: Advanced Member
Posts: 262
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Posted By Bob Adams on 11/10/2010
There is a study done by Merril Lynch which shows the importance of investing long term by observing what would have happened if the investment was made for 1 year -- You would have lost money 17% of the time. Spreading that time period out to 10 years, you'd have never lost money in the S&P 500--until the two decades beginning in 1989 and 1990.
If anyone is interested in seeing the results of that study in graphic form, send me an email: bob.at.seattle@gmail.com.
I don't need to be more depressed, but thanks!
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Rank: Advanced Member
Posts: 16
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Sorry Danny, I didn't mean to depress.  The study serves to show the advantage of investing long term and I use it for that purpose--and usually point out the period in which the study was done didn't include the past two decades. But if converted to a percentage--two decades out of many--the percentage is pretty small: 2 times out of 40 from 1970, when the study began.
Bob
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Rank: Advanced Member
Posts: 262
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BAC has some encouraging news on dividends for the next couple of years. I hope this continues for other bank and financials.
http://finance.yahoo.com/news/Bank-of-America-Dividend-tsmf-1631978938.html?x=0&sec=topStories&pos=3&asset=&ccode=
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Rank: Advanced Member
Posts: 262
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Rank: Advanced Member
Posts: 262
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Rank: Advanced Member
Posts: 262
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Rank: Advanced Member
Posts: 105
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From "Avoiding the Dividend Trap" http://finance.yahoo.com...idend-ms-1101828579.html > Dividends have historically accounted for 40% of the returns from investing in stocks, ... I don't understand why professionals almost always misstate the situation like that. What's actually correct is that *capital gains* produced by *reinvestment of dividends* have accounted for 40% of historical returns from investing in US stocks. Since it's nothing more than compounding at work, the 40% value gets bigger as the time period gets longer. I liked the rest of the article. -Jim Thomas
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Rank: Advanced Member
Posts: 262
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Rank: Advanced Member
Posts: 262
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Yes Jack the Total Return is going to be the barometer to really measure whether a stock will or has done well.
Here's another article with a list of 25 candidates
http://www.cnbc.com//id/43441980
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Rank: Advanced Member
Posts: 262
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Rank: Advanced Member
Posts: 262
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Here are some real life examples of the share repurchase vs. dividends paid to shareholders, via Seeking Alpha. I prefer the dividend route as I feel I am capable of knowing what to do with the proceeds.
http://seekingalpha.com/article/290791-are-dividend-investors-benefiting-from-stock-buybacks?source=email_investing_income
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