Valuation allow us to understand the value of a stock/counter and avoid in purchase overprice stuff. Anyway, valuation strategy is quite depend on investor's risk appetite and target profit.
2 important indicators for Dividend Stock?
First, let understand the 2 valuation Indicator that related to Dividend - DPS (Dividend per share) and DY (Dividend Yield).
- DPS (Dividend Per Share)
- - Dividend per Share refer to total dividend you can get by owning 1 unit of the share. Let say DPS = 10 cent, if you owning 100 unit of the share, then you will have 10 dollars as dividend. DPS is static and will not change by current Share Price.
- DY (Dividend Yield)
- - Dividend Yield are % of DPS gain relative to Share price of one share. Let say DPS = 10 cent and Current Share Price is 2 dollars, then DY = 10 / 200 = 5%. Which say, if you invested 2 dollars into this share, you will get back 5% gain (10 cent) per year.
- - Since DY formula involved share price, then we know that the lower share price is, the higher DY will be.
How to do valuation for Dividend Stock?
- Study the history dividend pattern of the company to get estimated DPS.
- Calculate the DY that you targeted then set a price alert.
- If Alert notified, then do 1 more study to understand why the share price drop.
1. Study the history dividend pattern of the company to get estimated DPS.
This step is to ensure Company have consistent Dividend Payout practice and to get a estimation on what is the expected DPS. When study history pattern, we need ignore Special Dividend (one time dividend that paid by company due to some special reason) because those only happen once in a blue moon, it will lead to false valuation.
What I normally did, I will study past 3 - 5 year Dividend and Profit pattern, if they are align, then this company have a good dividend payout pattern. Align refer to when company earn more, they pay more dividend and vice versa. Then I can either roughly estimate or do a relative calculation on Projected Profit for next 2 year. Example, let say pass 5 year DPS was, 10,20,30,20,40. Then I have 2 way to estimated DPS:
- Quick way: I will just take 30 as Estimated DPS since it is mid number for past 5 year DPS.
- Complicated way: I try to project next 2 year profit using CAGR formula, then use average dividend payout ratio to get the estimated DPS.
*Please take note when estimate DPS, remember to take in account any TAX that will impose into your dividend.Example US's 30 % tax for Non-local investor.
2. Calculate the DY that you targeted then set a price alert.
Now we have Estimated DPS. But what is the DY we want? It depends on our target. But i would suggest at least double of your country Fix Deposit Rate. I set a DY within 4-8% range depend on my watchlist. 4% are double of my country FD rate(2%) and I use 4% for company who are Dividend Company that still potential to grow in future, because in future when company earn more profit, the DPS will increase as well. For 8% target, I implement to pure Dividend Stock that business already mature and too big to grow fast. Example Bank Counter.
After have the Estimate DPS of the company, let say 50 DPS, and I target 8% DY, then I will set an alert of share price at 6.25 on any Stock Apps(there are various mobile apps allow us to set price alert. The reason I set alert, because I can't everyday chase 10-20 company share price, so let technology do the work.
3. If Alert notified, then do 1 more study to understand why the share price drop.
Now the share price has reach our target. For safety purpose, I will study the company again to make sure the reason of share price drop is not related to permanent fundamental damage. Here are 2 examples on permanent fundamental damage and temporary effect.
- Covid-19 are just temporary impact (1-2 year provided that the company have enough cashflow to survive). Once it over, economy and business will pick up.
- Company Fraud Case are permanent damage to company fundamental because it will reduce the customer confident level and impact the profit in future. Example WireCard have around 30% DY while i writing this article, but I don't really plan to buy it.
Once confirmed the impact is not permanent, then I will purchase my very fist batch. I always split my fund to 3-5 batch making stock purchase, this is to allow me to balance down and get better dividend.
Summary : Dividend valuation are not really that simple and required to do some calculation homework before purchase. But once you catch the idea, you can come out with the fair price very quickly.