HI DGI, Thanks for publishing these quarterly reviews. One thing that worries me is i keep hearing the dividend stocks are selling at premium now, it is trading close to historical high P/E. The question i have is that sure we cannot control the markets or price movement, however would it make sense to do something that would help us reduce the overall market risk with dividend stocks. Thanks again for motivating us to stay on track.
Anonymous: You're welcome. I also sometimes hear that dividend stocks are trading at a premium, but I don't see much evidence in support of that generalization. There will always be some dividend stocks that are fully valued or overvalued, but others that are fairly valued or undervalued. As a dividend growth investor, the challenge is to find the stocks in the latter category.
Instead of hearing that stocks are at historic P/E levels why not check them for yourself?2000-2001. JNJ, KO, and other common dividend stock had P/Es in the 30s. Today they are 19 and 20 for the popular dividend stocks I checked this morning (PG, KMB, KRFT, KO, JNJ, PEP)
Well thanks for your response, would it make sense to look at just 2000-2001 or like over a period of a decade like 2002-2012? Also we have all these different combination of Trailing PE, Forward PE and then mid like 6 months trailing and 6 months leading. In any event, goal is to buy at fair value and hold it as the compounding works with div reinvestment etc.
Anonymous: I usually look at where the current P/E ratio (ttm) is compared with the P/E ratios over the past 8-10 years. My recent articles on WMT and XOM provide examples of that approach. I don't attach much importance to forward P/E ratios because they are based on analyst estimates, and analysts are often wrong. The exception would be if the forward P/E ratio is higher than the trailing P/E ratio; then I try to see why earnings are expected to be lower in the future.
I agree with DGM. Look at a company's P/E ratio and compare it to its own history. Each stock will have its own range of what is cheap and what is expensive. Most tech companies right now are in the 9-12 range and have been for years. You'll never see KO or JNJ go down to single digit P/Es. Yet SBUX is always consistently in the 30s for years and years.
There will always be dividend stocks out of favor falling in price and create an opportunity. I own circa 10 stocks only for now (planing increasing up to 30 stocks as my portfolio grows) and even with 10 stocks I can see a few falling and providing with great entry points. So although in general it may seems as these stocks are overvalued as a group, it is not a valid statement when checking individual stocks.
DGM,Good articles recently on Seeking Alpha. That's where I first learned about your blog earlier this year. I admire your investing and blogging discipline. Keep up the machine.-RBD
RBD: Thanks for the feedback and encouragement, I appreciate it!
Those are some impressive YOY gains in dividends. Keep up the good work!
AAI: Thanks for the encouragement!