how to value stocks

The Dividend Yield

It is a payment from the company

to the shareholder

for holding the stock.

If you had the choice to buy ONE stock from two that bore the same risk, which would you choose?

A company who pay you a sum every three months to hold it’s stock

A company who doesn’t pay you to hold it’s stock at all

The first one of course!

So why do companies issue dividends?

To give you an incentive to buy the stock of the company.

We were buying the same car, dress and

steak, just at a lower price

By buying a stock, you are also paying

to get a dividend (i.e. paying to get

paid!!)

Why not buy it when it’s on sale?

HOW?

The company decides that they will issue, for example, €0.20/share

If you buy the share at €1, €3 or €5, you will still get the SAME dividend.

Similarly, if you pay $1,000,000 this month or $900,000 next month, you still get the same Ferrari

You are buying the same thing at a lower price!

How can I judge if a stock is on sale by looking at it’s dividend?

Dividend Yield = Dividend per Dividend per shareshare

Share Price

As the share price goes down, the dividend yield goes up

since the Dividend Per Share is fixed

The higher the dividend yield, the better the sale, the better the value

Take a company who pays €0.20 per share

Calculate the dividend yield for Investor A & B:

Investor A buys the stock at €2.50

Dividend Yield = 8%

Investor B buys the stock at €5

Dividend Yield = 4%

Which yield would you prefer?

If you have enough money

to buy just two stocks in the following table, which would the be?

Name of Stock Dividend Per Share

Current Price Dividend Yield

Vodafone €0.14 €1.50 ?

O2 €0.40 €6.00 ?

Meteor €0.54 €7 ?

3 €0.08 €3.67 ?

China Mobile €0.34 €2.70 ?

If you have €5,000 how many shares of each stock would you buy?

Each transaction costs €50

€5,000 / 2 = €2,500

€2,500/ Price of the stock = Quantity

How much dividend would you receive this year?

Quantity of shares x Dividend Per Share for both shares and add them up

Name of Stock Dividend Per Share

Current Price Dividend Yield

Vodafone €0.14 €1.50 9.33%

O2 €0.40 €6.00 6.67%

Meteor €0.54 €7 7.714%

3 €0.08 €3.67 2.1798%

China Mobile €0.34 €3.20 10.625%

If you have enough money to buy just two stocks in the following table, which would the be?

China Mobile – 12.59%Vodafone – 9.33%

If you have €5,000 net of transaction costs, how many shares of each stock would you

buy?

€5,000 – (2*€50) = €4,900

€4,900 / 2 = €2,450

China Mobile: €2,450/€3.20 = 765 stocks

Vodafone: €2,450/€1.50 = 1633 stocks

How much dividend would you receive this year?

China Mobile: 765 shares x €0.34 = €260.10Vodafone: 1666 shares x €0.14 = € 228.62

Total Amount = €488.72

The return from dividends alone is almost 10%Compare this to the rate at the bank…

Pick ten stocks which offer the highest dividend yield.

Hold them for a year and sell them next year if they

are still not offering the best dividend.

(We choose a year so as to give the companies time

to develop – too much chopping and changing

incurs many transaction costs and doesn’t allow the

stocks to grow)

Know what to buy Stocks with the highest dividend yield

Know why you’re buying it They are offering the best dividend at the lowest

prices Know when you will sell

Sell in a year if they are not offering the best dividend yield

Buy a number of stocks Buying ten stocks to diversify

Time Tested It has been time tested by many financial

analysts

Look at the dividend yield column and

use this to guide the stock selection.

Pick the top ten stocks which have the

highest dividend yield