Sunday, 21 August 2016

Investment metrics : Raising dividends

Another metric that I use when determining when to put my hard earned money to invest is raising dividends.  I like dividend investing, pick your stock, investigate whether it is fits your criteria to be in your portfolio.  Of course, neither me or anyone else can control whether the stock price goes up or down.  I would be lying if I only purchased stocks that increase in value.  That fact is, we can't control anything when it comes to the price of the stock.  What we can control is when to buy and dividends.  For a long term perspective, raising dividends appeal to me, a company that pays outs dividends has an obligation from the board of directors to maintain profits.  In fact, if a company hikes dividends on a regular basis, this translates into the board of directors having not only to maintain profits but to increase them.

An example of the type of chart to look for would be Fortis (FTS.TO).  Currently at a stock price of $42.95 with a quarterly dividend of $0.375 per share, Fortis' dividend yield is 3.49%  The dividend yield for any stock can be calculated by this simple formula.

Dividend per share paid times number of times paid during year / stock price

In Fortis' case, the calculation would be:

(0.375 x 4) / 42.5 = 3.49%

The formula can be changed easily when dividends are paid monthly as opposed to quarterly simply by change the 4 to a 12 in the above formula.

That being said, my ideal stock would have a dividend yield between 3.00% to 5.50%  This is what I would consider the sweet spot of dividend yields.  It gives you enough skin in the game and is also not being greedy.  There are tons of stocks with dividend yields above 5.50% but a high yield indicates a possible dividend cut.  Who wants that.

Here is a chart that sums up the last 4 years of dividend payments for Fortis:

Dividend Date
Aug 17, 2016
May 16, 2016
Feb 15, 2016
Nov 16, 2015
Aug 17, 2015
May 14, 2015
Feb 12, 2015
Oct 22, 2014
Aug 13, 2014
May 14, 2014
Feb 12, 2014
Nov 13, 2013
Aug 14, 2013
May 15, 2013
Feb 12, 2013
Nov 14, 2012
Aug 15, 2012
May 15, 2012
Feb 13, 2012
As you can, the amount of the dividend paid by the company increases once a year.  I like that.  If I was to go further back, I would see regular increases once a year.  Again I like that.  This is the type of chart I look for in a stock, raising dividends on a regular basis.

So along with my article on P/E ratios as an investment metric P/E Ratio  .  Raising dividends are another metric that I use to determine which stock my hard earned money I invest in.

Monday, 1 August 2016

Investment metrics : P/E Ratio

Another conversation happened recently.  "Peter, how do you know which stocks to pick?"  Well I will never advocate that I can pick winners every time.  But to at least know the basics of how to pick and what to look for as a "retail investor".  Since this term has been given to us by the real investors, aka the fund managers.  When a fund has a bad day, nothing really happens, they lose money and the fund manager continues with his life.  If a retail investor has a bad day, it can change your lifestyle if you are not careful.  That being said, to be careful, I use certain investment metrics to help me pick a stock.  This blog post will examine the investment metric called P/E ratio.

The P/E ratio or price-to-earnings ratio is likely one of the best known fundamental ratios, it's also one of the most valuable.  The P/E ratio divides a stock's share price by its earnings per share to come up with a value that represents  how much investors are willing to shell out for each dollar of a company's earnings.

P/E ratio

In the chart above, which is simply the big 6 banks in Canada currently and what their stock price is on August 1, 2016 along with their P/E ratio.  Why I am only using the same stocks in the same industry.  The reason being you can only compare P/E ratios of a similar company, that is where it is most valuable.  You could say it is comparing apples to apples and oranges to oranges.  I would not compare say a bank P/E ratio to a food stock P/E ratio.

So someone asks me which stock to buy that is the best bank.  Most investors have their tickers loaded into yahoo finance or google or even directly on their smart phone.  They right away say either TD bank or National bank.  TD trades at $56.89 and National trades at $44.71 so they are the cheaper stock, right?  That would be incorrect using technical analysis which includes looking at the P/E ratios.  I would answer that CIBC is the cheapest stock right now.  They answer, how can that be?  CIBC is at $99.19 which is almost double TD bank?

The answer lies in the P/E ratio.  CIBC's is at 10.88 vs TD Bank at 12.96  Simply put, investors value TD more than they value CIBC.  "Buy low, sell high".  Remember that old saying.  Using the P/E ratio, you buy lower valued stocks to sell high later.

Looking again at the chart, you will notice that BMO's P/E ratio is higher than the other banks by quite a bit.  Double CIBC's in fact.  This right away tells me that investors have rallied BMO stocks more than other bank stocks.  They think BMO will perform better than the other banks.  If you were to buy bank stocks today, I would take a double take at BMO and maybe avoid buying them using the P/E ratio as your guide.

At some point, you will come to the point of investing money into the bank stocks.  How much money tho?  $1,000? or $5,000?  Let's assume you are going to buy $5,000 worth of bank stock.  For BMO, that would be 58 shares, for TD that would be 87 shares and CIBC that would be 50 shares.  So basically you are buying $5,000 worth of stock but CIBC at $99.19 seems expensive?  It's the same amount of dollars invested, don't assume the stock price determines who is cheap and who is not?

Now you have a general understanding of using P/E ratio analysis to help you determine whether a stock is a buy or no buy.