Investing In Dividend Paying Stocks

Dividend is a crucial part for investors' investing return historically. According to Wikipedia, when dividend yield is high or rising, it is when investors' return among the greatest. For example, dividend yield of the Dow Jones Industrial Average plunged to a low of 3.2% during the market bubble of 1929 and rise to 15% during the stock market collapse of 1932.

I do not have a hard cold fact to back it up but let's just assume a historical average dividend yield of 3%. Since the world war II, stock market index has returned investors 10.5% return annually. That implies that dividend contributes to 28.6% of overall investors' return. Ignoring dividend will decrease your investing performance by that much, which can be devastating in the long run.

Having said that, what is the characteristics of stocks giving out dividend yield of more than 3%? One thing that can help is to find companies trading at below their fair value. The fair value of a common stock is when it is trading at around a P / E of 13.4. This means that a company trading at $ 13.40 would have to earn $ 1 annually. Assuming that it pays half of this profit as a form of dividend, you can then expect a dividend yield of ($ 0.50 divided by stock price $ 13.40) = 3.73%.

For growth stocks trading at 50 times earnings, you can rest assured that they will not have pay dividend that yields 3% year in and year out. The reason is quite simple. If a company earns $ 1 while its stock price is trading at $ 50, the most dividend it would pay is $ 1. At $ 50, the dividend yield for that stock is a measly 2%. Your dividend yield will actually be lower since most companies do not pay all of its profits in the form of dividend.

In summary, to boost your investing return by 28.6%, you need to find stocks trading at above average dividend yield of 3%. You will not find these dividend payers at a company whose stock is trading at 50 times earnings. The reason is simple. Even when they are paying out all of their profits as dividends, their dividend yield is still less than what average stocks pay historically. To find stocks paying dividend yield of 3%, you can start by buying companies trading at below fair value, which is defined as the stock trading at a forward Price / Earning Ratio of 13.4, assuming a 0% growth in earnings.

Would you want to boost your investing return by 28.6% in one simple swoop? Of course you do. It is like catching two birds with one stone. Finding stocks trading below fair value will enable you to extract capital gain as well as dividend payments.

Source by Hari Wibowo

Leave a Reply