Today I wanted to dive into a piece of my analysis that I constantly have been using, such as for TGT, AFL and MAT, where this is something that currently is not included in our dividend stock screener page. You have seen the trend of my posts have 1 other piece that I evaluate – the current year vs the 5 year dividend yield average for that company. Today… I will show why.
Am I Crazy for Evaluating this?
Why do I use the 5 year dividend yield average? I know upon review of the analyses that I use – I am sure that question has come up in your minds. What’s the point? What benefit does it provide an investor to know that? To me I feel as if it is easy to see why, but now I wanted to take my standpoint and think of it from a reader that may have those questions. From our screener – we have dividend yield thresholds, price to earnings thresholds, payout ratios and the like. A special valuation tool I use for these strong companies that I have begun incorporating is the current year in comparison to the 5 year yield average, I have 3 simplified reasons why.
1.) Factor of prior history. I am able to capture what the yield was during the first few months after coming out of the economic crisis. Typically, these yields were much higher during that time period. When you include that dividend yield for that day into your average – one would think that with such depressed stock prices back then, that those yields must have been extremely high and that it would be difficult for a stock in today’s current market to have a yield even close to that. That may be true for some stocks, but like I saw in TGT – the yield currently was higher now than the 5 year average. Reason 1 – You are taking into factor where it used to yield years ago with a more depressed market.
2.) Valuation. As my post in Mattel showed, the yield currently is higher by 16 basis points than the 5 year yield average. Given that there have been dividend increases with this stock and a more than 50% appreciation to this stock over that 5 year term – one would say this conclusion of a yield on a strong dividend paying company may be undervalued and is a better buy now than it was when it yielded a lower amount.
3.) Assists in Decisions. When I am analyzing the 5 year stock & yield history of a company it fully helps in my decision to purchase that stock. Majority of the stocks that are being purchased are companies who have a strong dividend payment & dividend increase history – given the #1 and #2 above – how much easier does this decision make for you if a dividend aristocrat who has paid and increased dividends for 25+ years is currently yielding higher than it has on average over the last 5 years? Makes it very easy from my stand point. Target would be the great example again here – they’ve increased dividends 42 years, and had over 1.4% higher than it’s 5 year average. When I first saw that metric, I smirked and thought – well – this one’s going to be easy. Whereas for Aflac – the yield currently is lower than the 5 year average. Not necessarily a deal-breaker, as this company has consistently increased their dividend – but it may show signs that currently the price is too high right now, or that the dividend amount needs to increase slightly without price appreciation. I purchased Target essentially right aware, where I am still evaluating Aflac and watching more of that price movement.
What are your thoughts on this metric-analysis category? Do you typically evaluate what the current yield compares to from a past history stand point? Obviously the cons to this could be that I am basing a decision of past stock history and that I need to currently evaluate current and future performance of the company – I still do that, but just like to review this metric, which isn’t a deal breaker if the current yield does not exceed the 5 year average. If the current yield “passes” this category, it more so – “Sweetens” the deal and makes a decision feel even better. Please comment your mindset behind this, questions or another metric you view – we would love to hear. Thanks again for stopping by everyone!