Tutorial: Calculating the Average High Dividend Yield Model Price
4 September 2007This post is part of a tutorial series at Dividends Matter.
My goal at Dividends Matter is “to empower individual investors to gain the knowledge, skill, and confidence required to invest in high quality, dividend paying stocks to generate steadily increasing cash flow and ensure a lifetime of successful investing.”
To that end, I want to ensure that everybody is able to do the same analysis that I perform to determine if a certain stock belongs in a portfolio of superior dividend yielding stocks.
Today, we will look at calculating the model price using the average high dividend yield method. For me, this is the most important model price as it sets the highest price that I am willing to pay for a stock.
First of all, I like to gather 10 years worth of data for the stock. This is easy to do because the stocks that I analyze have very long histories of paying dividends. The information we need is the high stock price, the low stock price, and the dividend paid out for each of the last 10 years.
Here is some sample data to work with as an example:
Historical Data Gathering
| Year | High Price | Low Price | Annual Dividend |
|---|---|---|---|
| 1997 | $10.63 | $7.83 | $0.44 |
| 1998 | $12.03 | $8.75 | $0.45 |
| 1999 | $9.93 | $7.29 | $0.45 |
| 2000 | $9.19 | $6.88 | $0.46 |
| 2001 | $11.89 | $8.56 | $0.47 |
| 2002 | $13.28 | $10.76 | $0.49 |
| 2003 | $15.24 | $11.63 | $0.52 |
| 2004 | $17.75 | $14.23 | $0.54 |
| 2005 | $25.64 | $17.00 | $0.59 |
| 2006 | $30.00 | $20.36 | $0.67 |
This is all the historical information we need. Now, from this information, we can calculate the high yield and the low yield for each year. The high yield is calculated by taking the annual dividend and dividing by the low price. Similarly,the low yield is calculated by taking the annual dividend and dividing by the high price.
High Dividend Yield = Annual Dividend / Low Stock Price
Here is how our sample data would look:
Tutorial: Calculating the Yields
| Year | High Price | Low Price | Annual Dividend | High Yield | Low Yield |
|---|---|---|---|---|---|
| 1997 | $10.63 | $7.83 | $0.44 | 5.62% | 4.14% |
| 1998 | $12.03 | $8.75 | $0.45 | 5.14% | 3.74% |
| 1999 | $9.93 | $7.29 | $0.45 | 6.20% | 4.55% |
| 2000 | $9.19 | $6.88 | $0.46 | 6.69% | 5.01% |
| 2001 | $11.89 | $8.56 | $0.47 | 5.47% | 3.94% |
| 2002 | $13.28 | $10.76 | $0.49 | 4.51% | 3.65% |
| 2003 | $15.24 | $11.63 | $0.52 | 4.47% | 3.41% |
| 2004 | $17.75 | $14.23 | $0.54 | 3.80% | 3.04% |
| 2005 | $25.64 | $17.00 | $0.59 | 3.46% | 2.29% |
| 2006 | $30.00 | $20.36 | $0.67 | 3.29% | 2.23% |
Now that we have the high dividend yields for each of the last 10 years, we can now simply average them out. For the 10 year average, you add up all the high dividend yields and divide by 10. For the 5 year average, you add up the last 5 years of high dividend yields and divide by 5.
For this particular example, the 5 year average high dividend yield works out to:
5 Year Average High Dividend Yield = (4.51% + 4.47% + 3.80% + 3.46% + 3.29%) / 5 = 3.91%
I now have the dividend yield that - on average in the past - has set the floor price for this particular stock. Investors did not allow the stock price to drop further because the dividend yield was too tempting.
Now that I know what yield is too good to pass up for this particular stock, I can now calculate the model price. I prefer to use the 5 year average high dividend yield when calculating my model price as it is more indicative of current interest rate trends.
The only information I need to calculate my model price is the current dividend. For example, if the current dividend was $ 0.84, then my model price would be $21.48.
Model Price = Current Dividend / Avg High Dividend Yield = $0.84 / 3.91% = $21.48
At this point, you can either use the last 12 month trailing dividend or you can determine the future dividend (that is, if the current dividend was just raised to $0.25, you could then assume that the future annual dividend would be $0.25 each quarter or a $1.00 annual dividend). Personally, I prefer to use the trailing dividend as that is a known quantity. Just make sure that you are consistent in your approach.
So there you have it. The “How to calculate the model price using the average high dividend yield methodology.”
Please remember that my analysis is but the beginning stage of your own investment analysis. I hope that my analysis will help point you towards an interesting stock worth studying further.
Remember that in the stock market, there is a buyer for every seller. One person thinks the stock is cheap, and the other thinks that the stock is expensive. Do your own due diligence.
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on September 4th, 2007 at 11:38 am
I appreciate seeing this approach to pricing a stock. As you mention, I beleive that it is important that a purchase not be made specifically on the price determined by this model alone. Much more analysis should be done, as well a perhaps running a couple of other pricing models such as running a historical p/e evaluation, book value, or any other one. The key is to be consistent with an approach and stick to your guns.
The Dividend Guy
on September 4th, 2007 at 12:21 pm
Excellent post. What sources do you use to get your data?
Have you ever considered REIT’s and high quality income trusts?
What about Mortgage Backed Securities (government guaranteed in Canada), not the subprime.
Larry
on September 4th, 2007 at 8:58 pm
Hi Dividend Guy,
As you know from seeing my analysis, I do perform other analysis as well. I use two other methods to determine a model price as well as looking at 6 key growth rates (including dividend growth rate), return on invested capital, and the dividend payout ratio. And I do plan to go through each one to detail my methodology for my readers.
But when choosing a company, you should be very comfortable in understanding how it delivers these numbers. Reading through the Annual Report would be one way to familiarize yourself with the company. You are going to own a piece of the company, so make sure you understand what you are buying.
Average Joe
on September 4th, 2007 at 8:59 pm
Hi Larry,
One of my favourite sources for this information is ADVFN Financials. You are typically able to find 10 years worth of data on their site and it is all very easy to find.
I have not tried using my methodology on REITs or income trusts yet.
Average Joe
on September 5th, 2007 at 12:31 pm
How would you factor stock splits? In the particular stock I am watching there have been 2 splits in 10 years.
on September 5th, 2007 at 11:58 pm
Hi Jim,
I do not factor in stock splits. Typically, when a stock splits, the previous financial information gets ’split’ as well. In other words, the historical information continues to compare apples with apples.
So if a stock paid a $1.00 dividend. After a 2 for 1 split, you will have 2 stocks, but then the dividend is $.50 each. And the data providers then go back and adjust the information.
on September 6th, 2007 at 11:19 am
Interesting post. Its nice to show everyone how the detailed analysis that you come up with for all the stocks comes out of a very basic set of numbers to begin with.
on September 6th, 2007 at 1:34 pm
Great post AJ! Looking forward to seeing the rest of the series!
on September 10th, 2007 at 3:58 am
[…] DividendsMatter.com. I will highlight some of the main points here, but I highly suggest that you read the full tutorial. First of all, I like to gather 10 years worth of data for the stock. This is easy to do because […]
on September 14th, 2007 at 7:46 pm
[…] 1. Dividend Money - Tyler over at Dividend Money has a good article on How to Calculate Average Dividend Yield, based on a previous article presented by Average Joe over at Dividends Matter. […]
on April 1st, 2008 at 10:09 am
Hello, do you have a good resource you use for finding the high and low stock prices for past years?? It get’s very tedious using Yahoo!
Thanks
Adam