The Loonie Bin: Show Me The Dividends…again

The Loonie Bin: Show Me The Dividends…again

Show Me The Dividends…again

In my final installment, I will talk about P/E ratios and the ever important dividend growth history and how vital it is to a dividend investor.

We all love juicy yields. But if it never increases, eventually that yield of 5% will still read 5%, but the ever annoying, invisible force called inflation is a compounding fiend and will make short work of that 5% yield over time. That’s why you want to invest in companies that grow their dividend every year to combat the evil inflation and your portfolio will live happily ever after. I’ll use my golden boy stock as an example. Enbridge is a pipeline company that has paid a dividend for 57 years. The yearly average increase is 10%. That increase of 10% a year negates inflation, leaving some of that growth to increase the yield on your original investment. That extra growth is the heart and soul of a dividend growth machine. It will increase your portfolio a lot more then investing dividends alone. When a company increases it’s dividend, it shows that the board of directors are confident of the outlook of the well run company, which in turn increases the confidence of investors to buy more stock. When the stock price goes up,the value of your shares go up. It’s like getting paid twice. Winner winner, chicken dinner!

So when I see a company cut it’s dividend, it means that the company wasn’t running at it’s full potential. A dividend cut is devastating to dividend investor. Your yield decreases and the stock price plummets as everyone gets out while the getting is good. It also puts your investment back 1 to 2 years depending on how bad it is. I stay clear of a company that cut it’s dividend. Manulife comes to mind and it will always be tainted to me. The only way I’ll ever own one shares is if it increases it’s dividend for the next 5-8 years. I don’t care that it’s been around forever and is one of Canada’s most lucrative companies, cutting a dividend a sin in my books.

That brings me to P/E ratios. To find the price/earnings ratio, divide the price per share by the earning per share.
For example. Enbridge’s current price is $51.17. It’s EPS is $3.65 as of July 16/2010

51.17/3.65= 14.02

So Enbridge has a P/E of 14.02. What does that mean? Obviously it’s a ratio between earnings and share price, but it can be used to gauge the volatility and popularity of a stock. It will be argued that a P/E ratio can mean many things, and that it’s an investor “assigned” value, so I won’t dwell on it too much. I’ve read that any stock you wish to purchase should have a P/E of around 15. If it’s above 15, it could be overpriced. If it’s below 15, it could be undervalued and would be a good buy. Notice I said could be undervalued. It might be low for a good reason, as if the stock is losing value because of an oil spill by chance? A stock with a low P/E also regarded as having low volatility, which is always good for the steady and conservative dividend investor.

A P/E ratio should never be used on it’s own to pick a stock. It should be one of many calculations used to determine which dividend stock to purchase. I use it only for comparison between companies I have on my wish list.

Well that concludes my long winded process of determining which companies to invest in. Again this is just my opinion and everyone has different ideas on how to pick good dividend payers. Find your own groove or consult an investor your trust for your own investment strategy. Have a good weekend!


About EdR

Tant que les lions n’auront pas leurs propres historiens, les histoires de chasse continueront de glorifier le chasseur. (proverbe africain)

Posted on February 7, 2011, in training tips. Bookmark the permalink. Leave a comment.

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