Jay2112
First Time Poster
Cash: $ 0.25
Posts: 1
Joined: 04 Nov 2005
|
| dividend valuation model |
 |
|
if a stock is currently selling for $40.00 a share and a dividend of 2.00 per share was just paid and you are estimating that this dividend will grow at a constant rate of 10% what is the expected rate of return? if $40.00 is a reasonable trading price?[/list]
|
Fri Nov 04, 2005 3:43 pm |
|
|
efflandt
Senior Member
Cash: $ 80.45
Posts: 401
Joined: 25 Apr 2005
Location: Elgin, IL USA
|
|
|
|
Is that $2/yr or per quarter (would be substantial if quarterly dividend)? If it is per year, it sounds like WM.
It somewhat depends whether you need the dividends now, or want even better future returns. Dividend reinvestment (DRiP or DRP) can increase your number of shares (usually at no cost), increasing your effective dividend yield (based on initial investment) at some future date when you start drawing dividends instead of reinvesting. I think I read somewhere that even a 3% dividend reinvestment can grow in 20 years to return 20% of your initial investment annually at that point. But it depends what the stock price does at dividend time (temporary dips can be welcome) or long term.
I did a rough spreadsheet estimate figuring a little less than the worst 3 yr period for my bank stock (2004 was a down yr. for them), 9.1% total annual dividend and growth (past 5 yr. average was higher). After a 10 yr period figuring in 15% capital gains tax, it could gain more than twice what I would save paying down principal on my deductable home loan (in 25% marginal tax bracket). And effective dividends drawn at that point (10 yrs) would be about 2.5 times actual dividend% of original investment.
So in time, dividend reinvestment with a solid company can give you better more consistant returns than just the stock market itself (certainly better than negative past 5 yr return of S&P 500). Although, you can gain (or lose) more by being more active in the markets than a set it and forget it DRiP.
|
|
Sat Nov 05, 2005 1:50 am |
|
|
cutemi
Contributing Member
Cash: $ 8.95
Posts: 41
Joined: 04 Nov 2005
|
| my answer to dividend valuation |
|
|
hi,,
let me answer .u can see it as a reference.
current stock price is $40.so its P0=$40,
and dividend $2 just paid.so its D0=2
dividend will grow at a constant rate of 10%,so g=10%.
D1,next year dividend is 2x(1+10%)=$2.2
bring it to the formula:
p0= D1/r-g
wherer D1 is the next year dividend
r is the required return
therefore we can get r
p0=D1/r-g
40=2x(1+10%)/r-10%
r=15.5%
as u ask: if 40 is a reasonable price ,so required return equals to expected return.or the market price of $40 is exactly what u can afford,$40 too!
my answer for u is expected return for this stock is 15.5%
|
|
Sat Nov 05, 2005 10:52 am |
|
|
forexdaytrading
Full Member
Cash: $ 12.40
Posts: 71
Joined: 14 Jul 2005
Location: Miami, Florida, USA
|
Jay2112, in order for all your mathematical projections to work, the company for which you are projecting the dividend growth has to be, as efflandt said, "a solid company." All of your projections will depend on this single requirement. In order for you to have any chance of determining whether the $40 price is "attractive" or not, you need to do a cash flow analysis of current and future (projected) earnings for the stock to find out its intrinsic value (this is one of the things Warren Buffett does). If the intrinsic value is above the current price by an attractive amount, then you have a greater "margin of safety" and a better chance of being accurate in your projections.
It is silly to assume that a stock from a company that is not solid or is overvalued will continue to increase X% a year. This is like expecting a baseball team to win the world series every season because it won the prior season.
What is the stock you are talking about?
|
|
Sat Nov 05, 2005 2:49 pm |
|
|
forexdaytrading
Full Member
Cash: $ 12.40
Posts: 71
Joined: 14 Jul 2005
Location: Miami, Florida, USA
|
Price fluctuation needs to be taken into consideration in the calculation of both "total return" and "return on investment." Both terms really mean the same thing. Jay2112 cannot assume that the return from dividends (assuming that his projection is accurate) is his "return on investment." That portion of the return is more of a yield-based return or a return from dividends excluding price appreciation. Doing this does not make sense anyway because it assumes that the price won't change from where it is, which is absurd.
|
|
Sat Nov 05, 2005 3:31 pm |
|
|
cutemi
Contributing Member
Cash: $ 8.95
Posts: 41
Joined: 04 Nov 2005
|
| formula |
|
|
P0=D1/(1+r) + P1/(1+r)
where:
D1 is the dividend paid at year's end and P1 is the price at year's end.P0 is the PV of the common-stock investment. r is the discount rate of the stock.
|
|
Sat Nov 05, 2005 5:13 pm |
|
|
forexdaytrading
Full Member
Cash: $ 12.40
Posts: 71
Joined: 14 Jul 2005
Location: Miami, Florida, USA
|
OK, coaster. I see what you are saying. I misunderstood what you said the first time. My bad.
Yes, the results will be different if dividends are reinvested in the stock. The return might be more or less than if the dividends weren't reinvested, depending on the average cost per share at the end. I have never reinvested the dividends automatically in a stock (like in DRIP's). I have always wanted to take full control of my investments and decide when to purchase more shares (not automatically via a dividend reinvestment plan). Some investors love DRIP's, but I am not one of them. First of all, you lose control when you particpate in DRIP's because you can't really buy or sell shares at the exact moment and price that you want to. It is so much easier to do this in a brokerage account. I know that some brokers tell you that is not "timing the market, but time in the market" that counts, but this is hogwash - just some excuse for you to stay put and not pester your broker.
|
|
Sat Nov 05, 2005 5:14 pm |
|
|
|
