I was reading an interesting article in my American Association of Individual Investors (AAII) magazine on Dividend Yields – anyone interested in investing really should check it out, the subscriptions are extremely reasonable and the quality of article significantly better than the vast majority that I have seen in the UK.
Anyone it was in relation to a stock screen and the importance of focusing on the dividend yield, one of the main reasons being they are cash that cant be distorted by accounting shenanigans unlike the earnings per share; a growing dividend with a sensible payout ratio from a financially stable company is worth its weight in gold but you need to buy at the right time.
Under and overvaluation as defined by the dividend yield creates opportunities; this is because value investors are attracted to high yields and buy pushing share prices up and then the converse happens as yields become overvalued.
Anyway I thought I would conduct a test on a UK Share, in this case Astrazeneca given the data available and the long track record of dividends.
Looking at the raw data it is possible to obtain a minimum and maximum dividend for each year and then get a long term average of these and see where dividends yields are in relation to history –
- above the long term average maximum yield = undervalued
- below the long term average minimum yield = overvalued
Putting this in a graph we can see the results
So is this effective……..lets look at some dates: –
- September 2002 – yield is into double digits by October 2003 the share price rose 50%
- January 2005 – yield is again over 10% and the share price rose by around 86% over the following 15 months
- March 2005 – yield is depressed at an all time low of just over 3% the share price would fall by almost 38% over the next year
- November 2008 – yield is again at close to 3% and the share price fell almost 20%
I think it is safe to say this little indicator can go a long way to keeping you out of trouble!