top of page
  • Writer's pictureIshfaaq Peerally

How to Value Dividend Stocks

I'm not really a great fan of dividends but with the low yield on bonds, it may make sense to look at some dividend stocks.

When Warren Buffett $BRK.B is investing in a company (or buying the whole company), he wants the management to reinvest the profits, then buyback shares, and only in third place, to pay a dividend.

For example, Apple $AAPL with over $70 billion in free cash flow a year and over $200 billion in cash. They can only reinvest about $15 billion in R&D. About $75 billion was used last year to buyback shares and then. $15 billion to pay dividends. Dividends are always third on the priority list, especially in the US, where most of the big tech companies such as Amazon $AMZN don't even pay a dividend. In the UK and Europe, dividends are much more important to investors.

But if a company can afford to pay you a dividend, you should be happy that they are doing so. According to Benjamin Graham, in Security Analysis, you should prefer a cash payment (dividend) over capital gain and, therefore, you need to apply a dividend premium, called the Dividend Factor, when valuing the stock. For example, if 2 equal companies with the same earnings but different dividend yields of 4% and 6% respectively, you should be willing to pay a higher price for the second company, just for the dividend.

However, we should always make sure that the company can afford to pay a dividend. For example, ExxonMobil $XOM has a dividend yield of 10%. They can only afford this with debt and is unsustainable long-term. The same thing happened to Boeing $BA which was forced to cut its dividends eventually.

That's why it is important to do your homework when looking for dividend stocks instead of just looking at the dividend yield.

Watch the full video on YouTube:

🔬Join my INVESTMENT RESEARCH PARTNERSHIP for all my analysis and research, along with a course for investing for beginners 🔬

📚 New to investing? Here's my investing COURSE FOR BEGINNERS with over 150 lectures 📚

🗣️Join my private investing FACEBOOK GROUP for more 🗣️

💬 Join my DISCORD CHAT 💬:

1 view0 comments


bottom of page