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TMFPostOfTheDay (< 20)

Valuation Growth and Dividends



March 26, 2013 – Comments (0)

Board: Dividend Growth Investing

Author: kelbon

"The Importance for Valuation for Dividend Growth." At first this headline struck me as about as relevant as "The Importance of a Pink Baby Blanket in Predicting a Child's Intelligence." Say what?

Valuation (what the stock sells for) has absolutely no bearing on whether a company will increase its dividend payments, or not. The performance of the stock and the performance of the company that stock represents are two discrete and separate issue (as are pink blankets and intelligence).

If, for example, you own Coca-Cola, have for a while, and are harvesting the dividend for income, it shouldn't matter to you if the stock seems a little over-valued because what is important to you is the predictable and rising dividends. What should matter to you is the productivity of the business and their ability to keep paying and raising the dividend.

The only pertinence valuation has when it comes to dividend growth investing is whether or not dividends are reinvested, or, alternatively harvested for income. If dividends are reinvested it's theoretically preferable to reinvest them in a company that has a modest valuation rather than a high one, you get more bang for your buck.

After all, some companies' stock, depending on the companies business models, seem to be perpetually under or over valued, based on their price/earning ratios. Buying a low P/E ratio stock isn't necessarily a better deal as far as dividend predictability and growth is concerned and it's also not necessarily a better deal as far as total appreciation goes either. After all, P/E ratios are low for a reason.

Every stock should be scrutinized on an individual basis, whether you intend to reinvest the dividend or not.

Obviously, it's better to buy good stocks when they are cheap. The dividend yield will be higher and perhaps the market might rethink their valuation upwards providing the business prospers. However, the emphasis is on "good businesses" and not "cheap."


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