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Using Target Dividend Yields To Identify Entry Points

20 August 2009 8 Comments

It’s a good practice to identify a target share price when researching stocks you want to buy. Another interesting strategy is to identify a target yield when determining an entry point.

For example, take a look at the following table.  It identifies a handful of nice dividend stocks, current yield and share price along with a target yield that I would like to buy.  The last columns show you what the share price needs to be in order to achieve the target yield as well as the decline needed to achieve that share price.

STOCK CURRENT TARGET CHANGE
Prev Close Div Yield Target Yield Share Price Share Price Difference SP % Decline Needed
Philip Morris (PM) $46.32 $2.16 4.66% 6.00% $36.00 $10.32 22.28%
Johnson and Johnson (JNJ) $59.80 $1.96 3.28% 5.00% $39.20 $20.60 34.45%
Coca Cola (KO) $48.61 $1.64 3.37% 5.00% $32.80 $15.81 32.52%
Caterpillar (CAT) $45.11 $1.68 3.72% 5.00% $33.60 $11.51 25.52%
IBM (IBM) $117.63 $2.20 1.87% 3.00% $73.33 $44.30 37.66%
McDonalds (MCD) $55.26 $2.00 3.62% 4.50% $44.44 $10.82 19.57%
Wal-Mart (WMT) $51.07 $1.09 2.13% 3.00% $36.33 $14.74 28.86%
Accenture (ACN) $36.30 $0.50 1.38% 2.00% $25.00 $11.30 31.13%
Conoco Phillips (COP) $42.59 $1.88 4.41% 6.00% $31.33 $11.26 26.43%
AVG $55.85 $1.68 3.16% 4.39% $39.12 $16.74 28.71%

If you look at the average decline needed for these stocks (28.71%), we can take a look at the S&P to see what such an decline would look like in the broad market.  Using the same closing date used in the table above (August 18, 2009), the S&P had a closing value of 989.  A decline of 28.71% in the S&P would equate to 705.  Will this happen?  Maybe, maybe not.

The best part of entering a position at a specific yield is that you lock in that yield (assuming the company keeps their dividend payout steady).   If you buy Philip Morris International at the target share price of $36.00 per share, you lock in the 6% yield.  If the stock then goes up to $45.00 per share, the yield is 4.8%, but that only applies to money that buys at that level.  You are still earning 6% on the money you invested because you calculate your return on the money invested, not the current share price.  The current share price only applies to your gain or loss should you sell the stock.

If you think about this, this should change the way you view investing, if you are strategizing for long term, cash flowing investments (this should be at least some part of your overall investing strategy).  Buy low, lock in attractive yields and re-invset those dividends wisely.  On a severe market correction, take advantage of low stock prices to lock in fantastic yields and then don’t worry about short term share price fluctuations (you just locked in a fantastic yield afterall and you plan to keep the position for years).  Going back to Philip Morris Int’l (PM), the stock hit a low of $32 a share earlier in the year.  If you bought the stock back then, you would have locked in a 6.75% yield!  Does this change the way you view investing?

8 Comments »

  • singapura said:

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  • blogc2011 said:

    The last columns show you what the share price needs to be in order to achieve the target yield as well as the decline needed to achieve that share price.
    read more