This is the second in a series of articles elaborating on The Dividend Observer Investment Process.
Nowadays, Stocks Ideas to trade/invest can be grasped easily in facebook. Most of us (Filipino) had been subscribed in investing or trading groups in facebook while others even subscribed to paid services like Truly Rich Club and Pinoy Investor, who are offering their services to guide us in our investing journey. Most of the time, we can’t buy all the stocks we want at the same time and we need to chose one over the other. How do you make your decisions to pick one over the other?
To Start with, I add companies to my list manually (Note: included in my list are those stocks listed in our Dividend Calendar page). Next, I will check the dividend history of the stock. I do preliminary background reading about the company if I am not familiar with the business. I read articles on blogs, Sites, Forums, News headlines, alerts to get familiar with idea. If I understand the business then I will proceed to quick valuation of company otherwise forget it.
QUICK COMPANY VALUATION
My quick company valuation was inspired by an article written by Andrew Beattie, “The four basic elements of stock value“. He says, if the ancient Greeks proposed earth, fire, water and air as the main building blocks of all matter, and classified all things as a mixture of these elements, then similarly in investing, there are four basic elements investors MUST use to break down a stock’s value. Described below are the four ratios quoted from his article:
Earth: The Price-to-Book Ratio (P/B)
Made for glass-half-empty people, the price-to-book (P/B) ratio represents the value of the company if it is torn up and sold today. This is useful to know because many companies in mature industries falter in terms of growth but can still be a good value based on their assets.
Fire: Price-to-Earnings Ratio (P/E)
The price to earnings (P/E) ratio is possibly the most scrutinized of all the ratios. If sudden increases in a stock’s price are the sizzle, then the P/E ratio is the steak. A stock can go up in value without significant earnings increases, but the P/E ratio is what decides if it can stay up. Without earnings to back up the price, a stock will eventually fall back down.
Air: The PEG Ratio
Because the P/E ratio isn’t enough in and of itself, many investors use the price to earnings growth (PEG) ratio. Instead of merely looking at the price and earnings, the PEG ratio incorporates the historical growth rate of the company’s earnings. This ratio also tells you how your stock stacks up against another stock. The PEG ratio is calculated by taking the P/E ratio of a company and dividing it by the year-over-year growth rate of its earnings. The lower the value of your PEG ratio, the better the deal you’re getting for the stock’s future estimated earnings.
Water: Dividend Yield
It’s always nice to have a back-up when a stock’s growth falters. This is why dividend-paying stocks are attractive to many investors – even when prices drop you get a paycheck. The dividend yield shows how much of a payday you’re getting for your money. By dividing the stock’s annual dividend by the stock’s price, you get a percentage. You can think of that percentage as the interest on your money, with the additional chance at growth through the appreciation of the stock.
The Dividend Observer Stock Screening Checklist
Before I proceed to the next level of valuation (STEP 3 – Stock Valuation), I often asked myself with the following questions:
- Is the Stock continuously distributing dividends in the last five years?
- Is the Dividend growth in the last three years at least 10%?
- Are you familiar with the business? Does it have a wonderful product?
- Is the P/E ratio below 20?
- Is the PEG ratio less than or equal to 1?
- Is the Dividend Yield greater than 2.5%?
This is basically the lists that I like to refer to every time I will review my portfolio to continually remind myself why I want to invest in a company. How about you, what is your stock screening criteria?
Thank you for reading and looking forward to our success in all our endeavor!