I do a test on dividend yield to see the relationship between the 5 year median dividend yield and the current dividend yield. Ideally you want the current dividend yield to be higher than the 5 year median dividend yield. With dividend yields, higher is better as far as stock price goes.
If the current dividend yield is higher than the 5 year median dividend yield it means that the current stock price is better than the 5 year median stock price. This is good because it means that the stock price is reasonable and is at the lower end of the reasonable range for the stock price.
If the current dividend yield is lower than the 5 year dividend yield look to see how much lower it is. If the 5 year median dividend yield and the current dividend yield are close, then the stock price is still in the reasonable range. Once the current dividend yield is 15% to 20% higher than the 5 year median dividend yield, the company's stock price is expensive.
If the current dividend yield is 20% higher than the 5 year dividend yield, it means that the current stock price is cheap. Stock prices are not often cheap. If the whole stock market is relatively low this is good. If the whole stock market is not relatively low and your company's stock price is cheap then you have to look and see if there are any problems with the company.
Unfortunately, an individual company's stock price is cheap because the market has lost confidence in the company for some reason. Find out the reason and ask yourself if the stock market is over-reacting or is it justified in its reaction. If the stock market has over-reacted to a problem and it often does, then this would be justification for buying a stock.
On my other blog I am today writing about Progressive Waste Solutions Ltd. (TSX-BIN, NYSE-BIN) ...continue...
This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. I do research for my own edification and I am willing to share. I write what I think and I may or may not be correct.
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