Why I Compare Current Dividend Yield to 5 Year Average

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.

3 Reasons

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!

-Lanny

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7 thoughts on “Why I Compare Current Dividend Yield to 5 Year Average

  1. Hi Lanny,

    This is definitely an interesting subject and I do look at a stock’s dividend yield over time to see what kind of trend there is. I expect that Target’s stock price will go up in the short term to drive down the dividend yield to more ‘normal’ levels for the reasons you’ve stated – but for now it’s a great time to lock in a 3.5%+ yield.

    I’m still forming an opinion on all of this – I tend to think that valuation is less important than yield and the future ability of the company to pay the dividend. After all, if I accept the company’s current dividend yield and buy it, then I’m saying it’s fairly valued to me. That seems more practical to me than trying to calculate that it might be worth $42; I could just as easily say I won’t buy it until the yield reaches x%.

    But some food for thought there, thanks!
    Best wishes,
    -DL

    • DL,

      Great insight. You bring up great points, especially the – Company’s ability to pay the dividend going forward and the current year where it is at. I think dividend growth rate fits in there as well – as Mantra has stated – it’s hard buying a 3.5% yielder who increases 1% every year and then not buy a 2.5% yielder who increases it 8% every year. I think it is definitely a company by company basis. I think the 5 year dividend yield average shows the price in comparison to dividend historically and gives you an idea of where it is at in comparison to a longer period average. It’s always a constant update. Keep the research hat on, thanks for stopping by!

      -Lanny

  2. I think you’re right with using an average. The best we can do is approximately. It’s good to be approximately right than precisely wrong. Do you also look at the 10 year average if available?

    Cheers,
    Henry

    • Henry,

      Thanks for the post. I have occasionally used the life-time dividend average, but tend to use the 5 year as it’s more current and relevant, obviously up for argument on that one. I like seeing if the yield is above or below a long period average, to see when the better time was/is to buy it. However – if it’s a great company, has sound fundamentals and the dividend payment always grows – then it sometimes can’t be a bad time to scoop some up. Thanks Henry for stopping by!

      -Lanny

  3. Thanks for your thoughts. I use the 5-year average on my personal screener as well – as you said, gives you an idea on the valuation and assists in decision making.

    Happy investing!

    • RoadMap,

      Nice – I like seeing that there are quite a few people that tend to use the 5 year dividend average. Sometimes I think we look into so many metrics that it clouds what the company is and does, as well as clouds the company’s track record of increasing their dividend. I haven’t made a purchase in a few weeks and I’m getting antsy! Thanks for stopping by Roadmap, talk soon.

      -Lanny

  4. Pingback: Dividend Yield Theory - Dividend Portfolio

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