Friday, 26 October 2012

Metric: Average Dividend Yield


Google “Average Dividend Yield”. Surprisingly, there is very little on the topic and practically nothing on how to use it as an investment tool.

The 5 year average dividend yield of a company can easily be found on internet. For example, Yahoo Finance indicates APD’s is 2.7%. Putting APD’s numbers into my Excel spreadsheet, I find that in 2008 and 2009, the maximum yields reached were 4.10% and 4.12%, respectively. That’s significantly higher than 2.7%! For comparison, APD currently yields 3.28%.

I might be 6 feet under the next time APD yields over 4%, or it may just be around the corner. It’s impossible to predict. And that’s precisely why I follow about 100 of the best dividend growth companies; because sooner or later, a few will drop enough in price to yield even more than they did in 2008 and 2009.

Among others, Walgreen Co. stands out.

The highest yields reached by WAG in 2008 and 2009 were 1.95% and 2.34%, respectively. In 2012, the stock bottomed at $28.53 with a dividend of $1.10. That’s a yield of 3.86%, much higher than in 2008 or 2009. Of course, WAG dropped in price for a reason. Uncertainty in its future gave us an opportunity to buy at a low price.

I bought 200 shares of WAG in 2010 for $29.00 (2.41% yield), just before it went to $26.26. Shortly thereafter, the stock price rocketted to about $44, only to come back down to $28.53. I never thought of selling. Instead, I bought 100 more in June 2012 for $30.21 (3.64% yield).

The entry yield on a stock will greatly influence your future returns.

Although buying at a low valuation reduces your risk, the yield is high for a reason (i.e. the price is low for a reason). But more often that not, market pessimism is a retail investor’s friend.

5 comments:

  1. Hmm I think you're on to something here. One metric I typically use is historical p/e, but historical yield would also be useful. Haha I can't believe I never though of it before!

    It would take all of 2 seconds to check, I will use this! Thanks

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    1. Glade you find this useful CI. By next week, I hope to have posted an article showing how initial yield makes a sizable difference on future returns. Happy hunting.

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  3. I have to admit I am very leery of buying stocks on the decline. I know there is value in some of these companies, but how do you know if they dont have unknown issues pushing the price down for a good but hidden reason? I do advocate buying on dips.

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    1. That's a very good point. That was the case with WAG. It was also the case with SNC, JPM and DELL. Buying on the decline is an important part of my strategy. That's how I get a relatively "high" initial yield. So far, i've been lucky in that buying on the decline has provided good results. If my decision making is bang on 80% of the time, i believe it will compensate for mistakes I will make. Also, I consider the risk a calculated risk. Think of NSC. People were buying without hesitation before the price decline. Those people are the ones that took on excessive risk. Buying at a lower price reduces your risk. Thanks for dropping by.

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