how to value stocks
DESCRIPTION
How to value stocks. The Dividend Yield. What is a dividend ?. It is a payment from the company to the shareholder for holding the stock. Why do companies give you money for that?!. If you had the choice to buy ONE stock from two that bore the same risk, which would you choose? - PowerPoint PPT PresentationTRANSCRIPT
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