Conventional Valuation Yardsticks: Dividend Yield

Dividend Yield

Why is my discussion of dividend yield so short?

• Although at one time a measure of a business's prosperity, it has become a relic: stocks should simply not be bought on the basis of their dividend yield. 

Too often struggling companies sport high dividend yields, not because the dividends have been increased, but because the share prices have fallen. 

• Fearing that the stock price will drop further if the dividend is cut, managements maintain the payout, weakening the company even more. 
• Investors buying such stocks for their ostensibly high yields may not be receiving good value.  On the contrary, they may be the victims of a pathetic manipulation. 
• The high dividend paid by such companies is not a return on invested capital but rather a return of capital that represents the liquidation of the underlying business. 
• This manipulation was widely used by money-center banks through most of the 1980s and had the (desired) effect of propping up their share prices.

Conventional Valuation Yardsticks: Earnings, Book Value, and Dividend Yield
Both earnings and book value have a place in securities analysis but must be used with caution and as part of a more comprehensive valuation effort.

The Alchemy of Stock Market Performance - Total Returns to Shareholders

Total Returns to Shareholders

Decomposing total returns to shareholders (TSR) can give better insights into a company's true performance and in setting new targets.

The traditional method decomposes TRS into three parts:

1. percent change in earnings
2. percent change in P/E, and, 
3. dividend yield.

A clearer picture can be found from breaking TRS into four parts:

1. the value generated from revenue growth net of the capital required to grow
2. the growth in TRS that would have taken place without the measure in (1),
3. changes in shareholder's expectations about the company's performance as reflected in a measure such as P/E, and
4. the effect of leverage.

A good company and a good investment may not be the same.

Example:

Comparing the company and stock performance of Reckitt Benckiser Group (RB) and Henkel from 2008 to 2013

Revenue growth and ROIC:   RB outperformed Henkel in both

Annualised TRS:  RB 19% and Henkel 932%)

Explaination:  Henkel's low starting multiple in 2008 reflected difficulties with its adhesives business, which experienced significant declines in sales volume in 2008 and 2009.




Expectation treadmill

This is the name for a problem faced by high-performing managers who try to meet market expectations that result from the high level of performance in recent periods.

RB above, illustrates the reason that, in the short term, extraordinary managers may deliver only mediocre total returns to shareholders.

Lesson derived (for investors and managers):  A small decline in TRS in the short run to adjust expectations (P/E) may be preferable to desperately trying to maintain TRS through acquisitions and ill-advised ventures.



Summary:

For periods of 10 - 15 years or more, it is true that if managers focus on improving TRS to win performance bonuses, then their interests and the interests of shareholders should be aligned.

The detrimental result of the expectations treadmill is that, for firms that have had superior operating and TRS performance, the managers who try to continually meet the higher expectations may engage in detrimental activities such as ill-advised acquisitions or new ventures.

A company should measure management performance in terms of the company's performance, not its share price.

Three areas of focus should be its performance relative to its peers in its::

• growth,
• ROIC, and 
• TRS,

Dividend Yield Investing

As deposit accounts pay very low interests or next to nothing, dividends on shares seem attractive. But you'll need to choose carefully.

Many large companies pay decent dividends once, twice or even four times a year. The yield – the dividend expressed as a percentage of the share price – is often attractive by comparison with interest rates on savings. There are now a wide range of blue chip companies yielding 4pc.



Warnings for those seeking Dividend Yield in their investing

When comparing a dividend yield with the interest rate on a savings account, however, certain warnings should be borne in mind.

1. The first point is that your capital is not guaranteed; share prices can and do fall.

2. Secondly, dividends can be cut drastically or axed altogether with little or no notice – and this can lead to a fall in the share price as well.


So just buying the shares with the highest dividend, without researching how safe that dividend is, can be a mistake.

There are now a huge range of high yielding blue chips but it is best to look for a dividend that is less likely to be cut even if that company's profits fall.

A high yield alone is not synonymous with a decent dividend.

If you carry out thorough research and pick the right shares, you will get better value for your cash than by leaving it in a savings account.



Measure of a dividend's reliability is Dividend Cover

The long-established measure of a dividend's reliability is dividend cover: the ratio of net profits to the size of the dividend payout.

Generally, a cover ratio of at least two – meaning that the company has twice as much net earnings as the amount earmarked for dividend payments – is considered a strong indicator.

Once again, for those who invest for yield or income - either Dividend Yield Investing or Dividend Growth Investing - STOCK SELECTION is still the key.

Search out for those companies that have a good chance of sustaining or even increasing their dividends.

If you are knowledgeable, you can even anticipate and avoid those companies that may skip or reduce their dividends in the future.




Stock selection is the key to dividend yield investing.

Some investors look at historic yields; some at forecast (or "prospective") yields.

But either way, those yields can be unexploded mines, lurking for the unwary.

Looking at yield on its own, in short, can quickly introduce you -- painfully -- to the meaning of the term "yield trap".



Yield Trap

The yield trap is simply explained.

You buy a share, attracted by the high yield. But the dividend is then cut, or cancelled -- leaving you without the anticipated income. Worse, unsupported by the payout, the share price usually falls as well, leaving you also nursing a capital loss.


Let's see it in action.

Company A pays out 9 pence a share, with shares changing hands for 100 pence per share. So the dividend yield -- which is the dividend per share, divided by the share price, and multiplied by a hundred to turn it into a percentage -- is 9%.

But that 9 pence is unsustainable. Company A then halves its dividend, slashing investors' income. What happens to the yield? If the share drops to -- say -- 80 pence, the historic yield the becomes 5.6%. The "yield on cost" figure, of course, is 4.5%.



How, then, should investors spot potential yield traps?  Answer:  Dividend cover

The most obvious reason for slashing the dividend is that the business simply hasn't got the money to pay it.

The business's earnings, in short, aren't large enough to support a distribution to shareholders at historic levels.

Put another way, actual earnings per share aren't sufficiently large when compared to the anticipated dividend per share.

Which is where the notion of 'dividend cover' comes in: earnings per share divided by dividend per share.



Interpret Dividend Cover with care

Now, dividend cover shouldn't be followed blindly.

Some businesses -- such as utilities, for instance -- can quite happily operate with lower levels of dividend cover than more cyclical businesses.

Other businesses -- such as REITs -- must pay out a fixed proportion of earnings as dividends, so again a low level of dividend cover is the norm.

Still other businesses have very high levels of dividend cover, because they are growing -- and therefore retaining earnings for future investment -- rather than paying them out as dividends.

But as a broad brush generalisation,

- A ratio of close to one is definitely the danger zone.
- A ratio much bigger than two indicates a certain parsimony.
- A ratio of 1.5-2.5 is usually what I'm looking for.



Stock Performance Guide on Dividends (by Neoh Soon Kean)

He considers dividend per share (DPS) as the most important factor when evaluating the worth of a share.

The ideal situation is for the DPS of a company to grow smoothly and rapidly over the years. (This is the Dividend Growth Investing I mentioned).

The DPS track record should be unbroken for many years.

One important caveat: you must compare the amount of dividend paid with the amount of earnings per share (EPS). (This is the dividend payout ratio).

- The growth of DPS must be proportionate to the growth of EPS.

- A company cannot sustain year after year of higher DPS thanEPS.

- On the other hand, the DPS should not be too small compared with the EPS unless the EPS is growing rapidly.

He advises, under normal circumstances, the DPS should be between 30% to 70% of the EPS.



Happy Investing

Dividends, Dividend Yield and Bond Yield

The Danger of Low Dividends

By Morgan House
April 25, 2013 

Earnings among S&P 500 companies are at an all-time high. By quite a bit, too: Operating earnings per share last year were more than 10% above the previous peak set in 2006, when the economy topped out before the recession.

Dividend payouts are also at an all-time high, but there is much less to be excited about here. Companies have been paying out a lower share of their earnings as dividends for decades, and the trend shows little sign of slowing. The dividend payout ratio is pitiful:

Source: Yale, author's calculations.

A lot of this decline over time is explained by companies using more of their free cash flow to repurchase shares. Benjamin Graham's classic 1949 book contains deep analysis and commentary on dividends, but scarcely a mention of share buybacks. That changed dramatically after the 1980s. Legg Masson has shown that from 1985 to 2011, S&P 500 dividends increased fourfold, but share buybacks increased 21-fold.  

The impact this shift has on how investors are compensated is deep. As Shawn Tully of CNNMoney pointed out earlier this year, the dividend yield on ExxonMobil (NYSE: XOM  ) is a little more than 2%, but the total yield including buybacks is north of 7%. Pfizer's (NYSE:PFE  ) dividend yields more than 3%, but with buybacks the company returns 7.6% to shareholders. Wal-Mart's (NYSE: WMT  ) total yield is about double its dividend yield.

There are mountains of evidence showing that, on average, investors are better off with dividends than share buybacks, as CEOs have a terrible history of buying back their shares at nosebleed prices.

But I think the damage of the shift toward buybacks may even be underrated. With interest rates at zero, investors have been clamoring for yield wherever they can find it. For years, that's been stocks with high dividends, whose prices have been pushed to record levels and yields down to near record lows. Shares of Verizon (NYSE: VZ  ) now yield less than 4% and Altria Group (NYSE: MO  ) , less than 5%.

These are still healthy yields, particularly compared with fixed-income alternatives -- and both companies have high dividend payout ratios. But I can't help but wonder whether companies favoring buybacks over dividends will ultimately be a disservice to companies with high dividends. The lack of yield among most stocks drives up valuations at companies that still do provide reasonable payouts, and high current valuations will eat into future returns.

Managers typically cite the desire to "enhance shareholder value" when announcing share buybacks. But never underestimate the power of unintended consequences. 

http://www.fool.com/investing/general/2013/04/25/the-danger-of-low-dividends.aspx

Don't Fall For False Security Of 'Defensive' Stocks

In times of uncertainty, and in preparation for market declines,Wall Street’s advice to investors is always the same. The market cannot be timed, and cash does not pay enough interest to even keep up with inflation. So investors need to remain fully invested and continue to buy stocks, but can protect themselves by shifting to ‘defensive’ stocks and sectors.

No matter what happens to the economy people will still have to eat, drink, and take their medicines. So food, beverage, and drug companies will continue to do well in an economic or market downturn, and the stocks of utilities and other solid companies that pay high dividends will also do well since the dividends will help offset a decline in the stock prices.

Although consumers will still have to eat, drink, and take their medicines, investors will not have to continue to value the earnings of those companies as highly as they did in a rising market. Stocks that sell at 20 times earnings in the excitement of a rising market may only sell for 12 times earnings by the time a correction has made investors more fearful. So even though a company’s earnings continue to rise, its stock will still be dragged down by the falling market.

The same holds true for the high dividend payers. They also do not escape the problem of investors not being willing to value their earnings as highly as they did in a rising market.

In fact, since defensive stocks and sectors are touted so heavily by Wall Street near market tops, driving their prices to more over-valued levels than other stocks, their subsequent declines often exceed the decline of the rest of the market.

It doesn’t take much research to check it out, but unfortunately most investors aren’t inclined to bother. However, that is my job, and here are the facts.

Utilities are traditionally among the highest dividend paying stocks, yet the DJ Utilities Average plunged 60% in the 2000-2002 bear market, considerably more than the 50% decline of the S&P 500. And it plunged 48% in the 2007-2009 bear market, not much different than the 50% decline of the S&P 500.

In lesser corrections the degree of safety promised for high dividend paying stocks has been equally disappointing for those who accepted the theory. In the summer correction of 2010 the S&P 500 declined 15%. The DJ Utilities Average declined 13%. So far in the current correction, the S&P 500 is down 7.8%. But the DJ Utilities Average is down 11.6%.  A similar relationship exists between the SPY and XLU ETFs.

Likewise, the ten highest dividend-paying solid companies in the 30-stock Dow are down an average of 18.9% in the current correction, compared to the S&P 500 being down 7.8%.  Look at the DVY ETF and how it has now held up well during the past month.

High-dividend payers have an added incentive for selling in the current correction since one of the risks of the ‘fiscal cliff’ is that taxes on dividends might jump significantly. And that’s true. But those same ten stocks plunged an average of 65.3% in the 2000-2002 bear market, and an average of 55.4% in the 2007-2009 bear, much worse than the Dow and S&P 500.

Meanwhile, we’re seeing the same historical pattern for the ‘still gotta eat, drink, and take their meds’ stocks.

So far in the current pullback, while the S&P 500 is down 7.8%, the still gotta eat and drink category is holding up fairly well, although Coca Cola (KO) is down 10.2% and PepsiCo (PEP) is down 7.3%.

In the ‘still gotta take their meds’ category, while the S&P 500 is down 7.8%, most major drug-makers are down more. Abbott Laboratories (ABT) is down 12.4%, Bristol Myers (BMY) is down 14.8%, Eli Lilly (LLY) is down 14.6%, and Merck (MRK) is down 10.7%.

You can blame it on concerns about drug company profits under Obamacare. But just as the high-dividend paying stocks plunged right along with the rest of the market in the 2000-2002 and 2007-2009 bear markets, so too did the drug-makers. Abbott Labs, Bristol Myers, Eli Lilly, and Merck, plunged an average of 54.5% in the 2000-2002 bear market, and an average of 49.1% in the 2007-2009 bear.

Several conclusions could be drawn from that history. The first is that there seems to be nothing to gain by repositioning into the so-called defensive stocks or sectors. In fact, by doing so one may come out the other side even more damaged than by holding onto current holdings.

Taking profits and moving to cash when risk is high would be a much better strategy, even though the cash would earn nothing, since one keeps the previous profits and can re-enter when the correction ends, rather than having huge losses and needing the next bull market just to get back to even. If the expected correction doesn’t materialize, the cost is only some lost opportunity for more gains, not the actual painful losses incurred by remaining fully invested and moving into so-called defensive stocks.

Another approach, which I prefer, is that the best defense is often a good offense. For instance, an ‘inverse’ etf or mutual fund designed to move opposite to the S&P 500, like the Rydex Inverse S&P 500 fund (RYURX), or the ProShares Short S&P 500 ETF (SH) will gain roughly 20% if the S&P declines 20%, more in larger corrections.

Regardless of what decision is made, let’s be street smart and realize that so-called ‘defensive stocks’ usually are not close to being so.

Sy Harding is president of Asset Management Research Corp.

http://www.forbes.com/sites/greatspeculations/2012/11/20/dont-fall-for-false-security-of-defensive-stocks/?partner=yahootix

Getting Rich with Dividends: 3 Tips to Improve Returns With Dividend Stocks

http://finance.yahoo.com/blogs/breakout/3-tips-improve-returns-dividend-stocks-172506087.html

Beware the "yield trap".

Understandably, income investors study dividend yields quite closely. After all, a share on a dividend yield of 5% will pay out twice as much as a share rated on a more miserly yield of 2.5%.

Some investors look at historic yields; some at forecast (or "prospective") yields. It's not a deal-breaker either way, although personally I prefer forecast yields.

But here's the kicker: either way, those yields can be unexploded mines, lurking for the unwary. Looking at yield on its own, in short, can quickly introduce you -- painfully -- to the meaning of the term "yield trap".

Siren call

The yield trap is simply explained. You buy a share, attracted by the high yield. But the dividend is then cut, or cancelled -- leaving you without the anticipated income. Worse, unsupported by the payout, the share price usually falls as well, leaving you also nursing a capital loss.

Let's see it in action.

Company A pays out 9 pence a share, with shares changing hands for 100 pence per share. So the dividend yield -- which is the dividend per share, divided by the share price, and multiplied by a hundred to turn it into a percentage -- is 9%.

But that 9 pence is unsustainable. Company A then halves its dividend, slashing investors' income. What happens to the yield? If the share drops to -- say -- 80 pence, the historic yield the becomes 5.6%. The "yield on cost" figure, of course, is 4.5%.

Dividend cover

How, then, should investors spot potential yield traps? The most obvious reason for slashing the dividend is that the business simply hasn't got the money to pay it.

The business's earnings, in short, aren't large enough to support a distribution to shareholders at historic levels.

Put another way, actual earnings per share aren't sufficiently when large compared to the anticipated dividend per share.

Which is where the notion of 'dividend cover' comes in: earnings per share divided by dividend per share.

Interpret with care

Now, dividend cover shouldn't be followed blindly. 

• Some businesses -- such as utilities, for instance -- can quite happily operate with lower levels of dividend cover than more cyclical businesses. 
• Other businesses -- such as REITs -- must pay out a fixed proportion of earnings as dividends, so again a low level of dividend cover is the norm.
• Still other businesses have very high levels of dividend cover, because they are growing -- and therefore retaining earnings for future investment -- rather than paying them out as dividends.

But as a broad brush generalisation, 

• a ratio of close to one is definitely the danger zone. 
• A ratio much bigger than two indicates a certain parsimony. 
• Personally speaking, a ratio of 1.5-2.5 is usually what I'm looking for.

5 Shares At Risk Of A Dividend Cut

Danger signs

The table below highlights five shares with dividend cover well into the danger zone that I've mentioned. They're all big names, and -- given their yields -- are popular with income investors. And in each case, I've shown the last full year's earnings per share and dividend, yield and dividend cover.

There are shares with lower levels of dividend cover, to be sure -- but they tend to be REITs, or other special cases. The five highlighted have fewer extenuating circumstances, and seem to me to be more in danger of reducing their payout.

Company	Forecast yield %	Full-year earnings per share	Dividend	Dividend cover
Standard Life (LSE: SL)	6.6%	13p	13.8p	0.9
United Utilities (LSE: UU)	5.3%	35.3p	32.1p	1.1
Hargreaves Lansdown (LSE: HL)	4.7%	20.3p	18.9p	1.1
Admiral (LSE: ADM)	7.7%	81.9p	75.6p	1.1
Aviva (LSE: AV)	10.1%	5.8p	26p	0.2

So should holders of these shares be worried? There isn't sadly, a clear-cut answer -- a fact that highlights the importance of looking at the underlying data quite carefully, and considering the full set of circumstances.

Reading the runes

Standard Life, for instance, seems clear-cut, on both a historic and forecast basis: by my reckoning, the dividend is genuinely sailing close to the wind.

But Hargreaves Lansdown and Admiral, though, complicate matters by distinguishing between an ordinary dividend and a more discretionary extra 'special' dividend. But either way, a cut is a cut, and both firms have a level of dividend cover just above one, implying that there's very little margin of safety.

United Utilities may surprise you, depending on which stock screener you use. I've gone back to the annual accounts, and used the underlying earnings per share of 35.3p, described by the company as "providing a more representative view of business performance" -- implying the level of dividend cover that I've shown. Plug the statutory basic earnings per share of 45.7p into the calculation, though, and the dividend cover is a healthier 1.4.

And finally, there's Aviva, where the opposite problem applies. On a statutory basis, the earnings per share of 5.8p delivers a disturbing level of dividend cover of 0.2. Throw in the company's own preferred definition of earnings per share, and a healthier level of earnings of 53.8p emerges, giving a dividend cover of almost 2.

Signs at the Bottom

The bottom - or near enough the bottom - of a market cycle theoretically should be easier to call than the top or near top.

The evidence is found in the corporate balance sheets, income statements, P/E ratios, dividend yields, and other quantitative measures.  It is likewise reflected in low ratios for the market as a whole.  The quantitative factors speak for themselves.

The dividend yield on the Dow Jones Industrial Average, for example, usually cycles between a high yield of 6 percent at the market's bottom and a low yield of 3 percent at the top.   The Dow's average dividend yield sometimes stretches beyond these boundaries, but historically this is a trustworthy parameter of undervalue and overvalue.

Comparing equity yields with term deposits is lazy

Marcus Padley
December 3, 2011

I have been getting a little bit irritated by the constant comparisons between the yield on equities and the yield on a bond or term deposit.

The argument goes that equity yields are now higher than bond yields and also higher than term deposits, so you should switch.

But the truth is that a comparison of the returns on term deposits or bonds with equity yields is simply lazy and ridiculous and reckless, because it misses the point about why people are in term deposits in the first place.

Let me explain by taking a well-known income stock - the National Australia Bank, one of the highest-yielding and safest blue-chip stocks in the market. The yield on the NAB is 7.5 per cent - 10.7 per cent including franking. That, everyone will tell you, is cheap and the argument is that all you mugs holding term deposits earning just 5.5 per cent are idiots because you get a whole extra 2.2 per cent in the NAB or 5.2 per cent including franking.

Fair enough, until you consider this exercise.



Get a chart up of the NAB over the last year (one year will do). Now mark off the peaks and troughs since January and calculate how many and how big the variations have been. You will find that the NAB has had 10 fluctuations. Five rallies and five falls.

The size of the rallies has been +12.8 per cent, +17.8 per cent, +8.3 per cent, +23.2 per cent and +26.9 per cent. The falls have been -9.8 per cent, -15.3 per cent, -23.9 per cent, -13.5 per cent and -18.7 per cent and if we picked a smaller-income stock or took NAB out over a longer period, it would be even more dramatic.



Now tell me after 10 moves of more than 7.5 per cent in just a year that I should be worrying about the 7.5 per cent yield on the NAB. Now tell me, amid that volatility and instability, that I should mention the yield on the NAB and the yield on a risk-free term deposit or bond in the same breath. Now tell me the prudence behind selling my term deposit and buying the NAB.


The NAB and almost all other income stocks in the current market, are not stable low-risk investments; they are volatile trading stocks and the message is clear and let's make it clearer, once and for all. You cannot compare the yield on an equity to the yield on a bond because one includes no risk of a capital loss (no risk of a gain either) and the other contains a currently huge perceived risk of a capital loss (or gain).

Promoting income stocks because they yield more than a bond is ignoring that extra risk and misunderstanding why people are now in bonds and term deposits. They are there because they don't want to lose any more money. Because they don't want volatility.

The only way to compare equities to bonds or equities to term deposits is if the equities came with a price guarantee, which they don't, or if you compare risk-free yields with the expected total return from equities, which includes the extra volatility and risk and not just the dividends.

In the current market, equities are nothing like a bond or term deposit because share-price risk is dominating the investment decision not the yield. Do you really think people are in term deposits to make 5.5 per cent? No, they are in term deposits to avoid losing money. The focus is on the risk not the return. Risk rules.

But it's not all gloom. The good news is that this is not a normal state of affairs. The sharemarket is supposed to be about opportunity not risk and the fact that risk is so in focus means the opportunity side of the equation is being ignored.

Also, risk can change very quickly. Ahead of the last European Union summit the market jumped 11 per cent in four days on lower perceived equity risk. The banks jumped 19.2 per cent. If the GFC doesn't reignite, the focus is going to very rapidly swing back to yields and price-to-earnings (PE) ratios. If the GFC is behind us, how long do you think the NAB is going to trade on a 10.7 per cent yield and the market on a PE of 10.7 times against a long-term average of 14 times?

Not long. In which case the game now is not debating the marginal merits of term deposits versus equities but waiting for a chink of light in the outlook for risk, because that is all that matters and because when it appears, the herd is going to smash down the door to get to those yields and PEs.

At the moment they don't believe in them. Your job is to be on the ball on the day they do.

Marcus Padley is a stockbroker with Patersons Securities and the author of sharemarket newsletter Marcus Today. His views do not necessarily reflect those of Patersons.



Read more: http://www.smh.com.au/money/investing/comparing-equity-yields-with-term-deposits-is-lazy-20111202-1oakh.html#ixzz1jkzaigzd

QUICKIES: Seven investment myths you should not fall for

Text: Prerna Katiyar | ET Bureau

Pick this stock, it's trading at 52-week low.' 'That stock is a multi-bagger, trading at such a low PE.' 'Penny stocks make fortunes while stocks trading below book value are a sure pick for making quick bucks.'

Haven't we all heard such statements at some point in our lives? If you are one of those who believe in such assertions, read on. For, these are among the many myths in investing.



Here we list seven of them


Myth No 1: Stocks trading below book value are cheap

Book value (BV) is the actual worth of a stock as in a company's books/balance sheet, or the cost of an asset minus accumulated depreciation.

BV depends more on historical cost and depreciation and often has little correlation to the current share price.

Shares of industries that are capital intensive trade at lower price/ book ratios, as they generate lower earnings. On the other hand, those business models that have more human capital will fetch higher earnings and will trade at higher price/book ratios.

"Price/book (ratio) of below 1 may be cheap but one should see other aspects such as earnings forecast, guidance, management and debt on the books of the company ," says Angel Broking's equity derivatives head Siddarth Bhamre.


Myth No 2: Stocks trading at low P/E are under-valued

Price to earning ratio (P/E) is one of the most talked about ratios in the market. This is based on the theory that stocks with low P/Es are cheap.

However, P/E alone doesn't tell much about the stock price. P/E multiples may be a quick way to value a stock but one should look at this in correlation with expected growth earnings, the risk factors involved, company's performance and growth potential .

"This is surely a myth. It is also an indication of uncertain future earning of the stock concerned," says Birla Sunlife Mutual Fund CEO A Balasubramanian.

The idea behind dividing price with earnings is to create a levelplaying field where some kind of comparison can be made between high- and low-priced stocks.

Since P/E ratios vary across sectors, with growth stocks consistently trading at higher P/E, one can only compare the P/E ratio of a stock to the average P/E ratio of stocks in that sector.


Myth No. 3: Penny stocks make good fortunes

Penny stocks by nature are lowpriced , speculative and risky because of their limited liquidity, following and disclosure.

If it's easy to invest in penny stocks - as here you shell out much less money per share than you would require for a blue-chip firm - it's also easy to lose.

Says Bhamre, "Fortune can be made by high-denomination stocks also. Denomination has nothing to do with the rationale for picking a stock. Generally , retail investors are fond of stocks that are at sub- Rs 100 levels. But there may be stocks that may be trading in Rs 1,000-plus price but may well be cheap. Clarity on earnings is more important here. Anytime, I would be more comfortable buying an ICICI Bank (currently trading at Rs 1,038) than an IFCI at Rs 45. One should look at earnings visibility."


Myth No. 4: The worst is over in the stock market

Timing the market, a common strategy among investors, means forecasting and that should best be left to astrologers and tarot readers.

If one has done one's valuation studies, one shouldn't worry about timing the market. No one had predicted the bull run would take the Sensex from a level of 10,000 in February 2006 to over 21,000 in January 2008 - just as no one had any idea of the following crash, which saw the same index plummeting to 9,000 in March 2009.

"Timing the market is more of a gut feeling. It's more on the basis of perception, as there is no such thing (that the worst is over) when the future is uncertain. One can never surely time the market. The worst is over is more of a probability than a certainty. Timing the market is very difficult as market is driven not just by earnings but also by sentiments ," says Balasubramanian.


Myth No 5: Stocks that give high dividends are the best bet

This comes from the notion that regular dividends are extra income in the shareholder's hand. This may not always be true.

While a company may be making decent payouts every year, the share price appreciation may not be comparatively high. Before investing in companies paying high dividends, it's important to analyse if the company is reinvesting enough profit to grow its earnings consistently.

Says Brics Securities' research VP Sonam Udasi: "It's not dividend that matters but the yield. For eg, a company may pay a 100% or even a 300% dividend on a stock with face value of Rs 10.

So, the investor may receive Rs 10 or Rs 30 per share when the stock may be currently trading at Rs 800 or Rs 1000. This would translate into an yield of 1% or 3% only. Also, such companies may not necessarily be reinvesting their earnings in the business to generate future earnings and so there may be no stock movement. The dividend may be high but the EPS and growth per se may be constant."



Myth N0 6: Index stocks are the best stocks

If this was true, most investors would safely park their money in such stocks in anticipation of maximum profit without looking out for other value stocks.

Most indices are a collection of stocks with the highest market cap. Take, for eg, the Sensex.

Companies that make up the index are some of the largest, with stocks that are highly traded based on their free-float.

"Index stocks may not necessarily be the best stocks as they are mostly based on market-cap or free-float of the company and not earnings. This doesn't mean that all stocks of the Sensex are highearning stocks. One must take a stock-by-stock call," says Balasubramanian of Birla Sun Life Mutual Fund.

The stock price of a company depends on its earnings. One can find high-earning stocks outside the key indices as well, he says. The risk is certainly less with index stocks as they are well researched and leaders in their respective sectors, but, again, the margins may not be very high. So it's better to keep your eyes open to other stocks, too.



Myth No 7: Stocks trading at 52-week low are cheap

Says Udasi: "There may be a time in the economic cycle when a blue-chip stock may hit a 52-week low.

But the first thing that should come to one's mind is why did the stock hit the 52-week low.

There must be something fundamentally wrong with the stock if it has hit a 52-week low, and chances are they may hit a new 52-week low.

52-week low in itself guarantees nothing. If at all one is picking stocks at 52-week lows, they should have a long-term horizon so that when the economic cycle turns, the stock is able to recover."

Needless to say, quality matters most while buying any stock.


http://economictimes.indiatimes.com/seven-investment-myths-you-should-not-fall-for/quickiearticleshow/9438662.cms

'A great opportunity to buy equities will emerge'

'A great opportunity to buy equities will emerge'
Shares will stage "a very strong and sustained rally" if a solution is found to the debt crisis, according to a senior investment strategist.

Mr Scott said he doubted that the eurozone would survive in its current form Photo: Bloomberg News

By Richard Evans

3:55PM GMT 06 Dec 2011

25 Comments

Even a break-up of the eurozone would provide a good opportunity to buy equities, said Ted Scott, the director of global strategy at F&C Investments.

"With each emergency summit proving to be more disappointing than the last, investors have lost faith in the eurozone policy-makers to provide a solution that will work," he wrote in a research note under the heading "A great opportunity to buy equities will emerge".

"This has contributed to a collapse in investor sentiment with fear the overriding emotion in today's markets."

But he added: "If a satisfactory solution for the debt crisis were to be found, the reversal in investor sentiment could contribute to a very strong and sustained rally."

Mr Scott said he doubted that the eurozone would survive in its current form, but that even a break-up of the bloc would be a positive "end-game" for investors.

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"I believe the end game is moving towards some form of break up in the Eurozone and this will be the catalyst that provides an attractive entry point for equity investors," he said. This was despite his assessment that "the risk of a second global recession and financial crisis, at least as bad as 2008, cannot be discounted".

He said the valuation for equities was "low from a historical perspective". "The dividend yield on most markets is high, especially against government bonds for AAA-rated countries. When dividends yield more than bonds it is traditionally a strong buy signal that has rewarded investors handsomely."


http://www.telegraph.co.uk/finance/personalfinance/investing/8938388/A-great-opportunity-to-buy-equities-will-emerge.html

What is a dividend yield?

How To Position Your Money For The Stock Market Rebound

 Posted: August 15, 2011 9:47AM by Tim Parker

"But there is no joy in Mudville - Mighty Casey has struck out."

You've probably read the poem Casey at the Bat when you were in school. The poem is about a baseball team that was losing by two runs as the end of the game came near. The team's star player Casey was the fifth batter in the final inning. All the team had to do was somehow make it through four batters and, if they could, Casey would be up and surely win the game for the team.

The first two batters did not reach base. The crowd and the team were low on hope, especially with the next two batters being two of the weakest on the team. Sure enough, they each got on base. With the crowd energized and cheering loudly, here came Casey. He was so confident that he would win it for the team that he let the first two balls go by for strikes. Then came the third pitch …"mighty Casey has struck out."

The stock market has made all of us feel a lot like a resident of Mudville who was at the game that day. The market goes down 600 points and all hope is taken from us. The market goes up nearly 500 points and we're reenergized. The market continues to disappoint, and your portfolio might look like a big series of strikeouts leaving you fearing for your money. When we have no economic joy, we tend to look only at the now. This causes us to make bad decisions with our money.

TUTORIAL: Investing Concepts

Do you need some encouragement? "If you bet against the United States of America, you will surely lose," said Dick Grasso, former CEO of the NYSE on August 11. "We live in the greatest country on the planet … the strength of [the economy] is going to blow your socks off," said Jamie Dimon, CEO of JP Morgan Chase. Finally, don't forget the famous words of Warren Buffett who said: "Be fearful when others are greedy and greedy when others are fearful."

The world economies may look dire, and investors around the world are worried about what happens next. Great investors never look at now. They look to the future. The only thing they do right now is position themselves for the recovery. Here's how:

Do NothingIf you have a 401(k), IRA or other long term retirement account, and you won't be retiring for decades, do nothing. Leave your money alone. History is clear. When downturns such as this happen, they don't tend to cause panic while they're here. Much like a bad storm, they leave quickly.

Even if it were a few years, that's not going to hurt your retirement accounts when you look at it in the context of a multi-decade time horizon. If you're close to retirement, you should probably still do nothing, but speaking to a financial adviser may ease your fears. (For related reading, see An Introduction to Ineligible IRA Contributions.)

Buy StocksDo you have a favorite stock? When great companies get pulled down by an economic downturn, the sale sign shows up on that stock. Buy it while it's on sale and then hold it for a long time. With many stocks down 10-20%, these stocks are priced as if they belong in the clearance bin. Buy a little now, and if the markets continue to fall, buy more at even lower prices.

Find the Accidental High YieldersCNBC's Jim Cramer advises investors to invest in accidental high yielders when the market falls. These are stocks that see their prices go down so much that their dividend yield goes up to highly attractive levels. Although this isn't a recommendation to buy these two names, Frontier Communications saw its dividend go up to 11% and Eli Lilly to nearly 6%. There are plenty of other stocks with yields that are just as attractive.

You should never buy a stock based only on the dividend yield. In downturns, great companies often become even more attractive because of their higher yields. Buy while the stock is low because the dividend yield will retreat as the stock price goes higher.

Fund Your IRAWhen the market is down, it's the perfect time to fund your IRA. That money will immediately go to work on those investments that are currently on sale. Of course, you should balance your retirement funding with protecting your finances from an economic downturn, but if you have enough money in your emergency fund put more money to work for retirement.

Get Ready to Buy an Index FundAn index fund tracks the performance of a certain index such as the Dow Jones Industrial Average, the Russell 2000 or the S&P 500. It's best to wait until the market calms down, but once it does consider buying shares of the SPDR S&P 500 ETF (SPY) or index instrument of your choice.

While this will allow you to capitalize on the recovery, you want to protect yourself. Make sure to set a stop or trailing stop so you don't lose a lot of your investment if the markets take a turn for the worse. ETFs are generally regarded as an investment for those experienced with the stock market. (For more on ETFs, see Using ETFs To Build A Cost-Effective Portfolio.)

TUTORIAL: 20 Investments You Should Know

The Bottom LineThere may not be joy in Mudville today, but successful investors know that looking at today is a losing strategy. Look years into the future, and take advantage of the low prices that are available to you. Casey may have struck out today, but never bet against a winner. His next home run isn't far away.

Read more: http://financialedge.investopedia.com/financial-edge/0811/How-To-Position-Your-Money-For-The-Stock-Market-Rebound.aspx?partner=ntu8#ixzz1VKPRMq1t