How to value stocks

1. How to value stocks The Dividend Yield

2. What is a dividend? It is a payment from the company to the shareholder for holding the stock.

3. Why do companies give you money for that?! If you had the choice to buy ONE stock from two that bore the same risk, which would you choose? • A company who pay you a sum every three months to hold it’s stock • A company who doesn’t pay you to hold it’s stock at all

4. Which would you choose? • The first one of course! • So why do companies issue dividends? To give you an incentive to buy the stock of the company.

5. Remember these?

6. How did we know they were on sale? We were buying the same car, dress and steak, just at a lower price

7. So what has that got to do with a dividend?

8. It’s all about buying good value! • By buying a stock, you are also paying to get a dividend (i.e. paying to get paid!!) • Why not buy it when it’s on sale? HOW?

9. A stock on sale? • The company decides that they will issue, for example, €0.20/share • If you buy the share at €1, €3 or €5, you will still get the SAME dividend. • Similarly, if you pay $1,000,000 this month or $900,000 next month, you still get the same Ferrari • You are buying the same thing at a lower price!

10. The Dividend Yield How can I judge if a stock is on sale by looking at it’s dividend? Dividend Yield = Dividend per share Share Price

11. The Dividend Yield As the share price goes down, the dividend yield goes up since the Dividend Per Share is fixed The higher the dividend yield, the better the sale, the better the value

12. Take a company who pays €0.20 per share Calculate the dividend yield for Investor A & B: • Investor A buys the stock at €2.50 • Dividend Yield = 8% • Investor B buys the stock at €5 • Dividend Yield = 4%

13. Which yield would you prefer?

14. If you have enough money to buy just two stocks in the following table, which would the be?

16. If you have €5,000 how many shares of each stock would you buy? Each transaction costs €50 €5,000 / 2 = €2,500 €2,500/ Price of the stock = Quantity

17. How much dividend would you receive this year? Quantity of shares x Dividend Per Share for both shares and add them up

19. If you have enough money to buy just two stocks in the following table, which would the be? China Mobile – 12.59% Vodafone – 9.33%

20. If you have €5,000 net of transaction costs, how many shares of each stock would you buy? €5,000 – (2*€50) = €4,900 €4,900 / 2 = €2,450 China Mobile: €2,450/€3.20 = 765 stocks Vodafone: €2,450/€1.50 = 1633 stocks

21. How much dividend would you receive this year? China Mobile: 765 shares x €0.34 = €260.10 Vodafone: 1666 shares x €0.14 = € 228.62 Total Amount = €488.72 The return from dividends alone is almost 10% Compare this to the rate at the bank…

22. A “dividend yield” strategy Pick ten stocks which offer the highest dividend yield. Hold them for a year and sell them next year if they are still not offering the best dividend. (We choose a year so as to give the companies time to develop – too much chopping and changing incurs many transaction costs and doesn’t allow the stocks to grow)

23. Features of a successful strategy • Know what to buy • Stocks with the highest dividend yield • Know why you’re buying it • They are offering the best dividend at the lowest prices • Know when you will sell • Sell in a year if they are not offering the best dividend yield • Buy a number of stocks • Buying ten stocks to diversify • Time Tested • It has been time tested by many financial analysts

24. Now, do it in real life…

25. How? • Look at the dividend yield column and use this to guide the stock selection. • Pick the top ten stocks which have the highest dividend yield

26. This IS the construction of a strategic portfolio