In selecting stocks with dividend as a consideration, take note of the following:
1. Dividend Paying
2. Company that is interesting to you
3. Good payout ratio
4. Good ROE
5. Manageable or no debt
6. Consistent revenue and earnings growth
7. Business model that you can understand
Company that is interesting to you
A company that is interesting to you is a company that you enjoy following and talking about with others. A company that is interesting to you will motivate you to learn more about that company.
Good payout ratio
The formula for the payout ratio is Dividends/Earnings. Basically, a lower payout ratio is better. Low payout ratios hints that a company may still have the capacity to increase their dividends in the future while plowing back enough money to the company. A good payout ratio is not more than 60%.
ROE or Return on Equity’s formula is profit/equity. A good ROE can roughly be defined as anything more than 10%. A good ROE is important because it indicates that a company can generate profit without much capital outlay. It also indicates that the company has strong market dominance and it should mean that the company is resilient.
Manageable or no debt
This can be determined through the use of debt to equity ratio. A debt to equity ratio of less than 200% is most desirable.
Consistent revenue and earnings growth
Generally, a higher growth rate in earnings and revenue is better than lower growth rate since the value of your shares will rise faster.
Business model that you can understand
Start with a company that you can understand how they make money so that you’ll know when they will make good and when they will do poorly.
Let’s apply what we had learned in real life! 🙂
(Selection is made on May 1, 2012 prices)
STEP 1: Dividend paying?
All of the companies that compose the PSEi are dividend paying except for BEL and FGEN so we are going to eliminate it from the list leaving us only 28.
STEP 2: Interesting to me?
Here, personal preferences vary but let’s just assume that I find all the companies interesting.
STEP 3: Good payout ratio?
Using this formula: Payout ratio = 2011 dividend / 2010 EPS
We are going to screen the stocks with payout ratio not beyond 60%.
STEP 4: Good ROE?
As stated in the previous post, we assumed that a good ROE is above 10%. We used 2010 ROE since some companies had not yet released their
2011 financial statements.
Now we have a narrowed list.
STEP 4: Manageable or no debt?
We are looking for a company that has a debt not more that 200%.
All the companies passed the screen.
STEP 5: Consistent revenue and earnings growth?
It appears that our selection is trimmed down to only two:
STEP 6: Business model that you can understand.
Another subjective criterion in this approach is determining whether the business model is simple to understand or not.
Describing the company in one simple sentence is a good exercise to determine whether it is understandable or not to you.
This is what’s going on in my mind if DMC and JFC are mentioned:
They make money by selling good chicken joy and jollyhotdog and they also have Mang Inasal as a subsidiary which I like to go eat with my family and friends.
After grueling screening, we ended up selecting JFC.
JFC @ 112.10