Too many investors ignore stock valuation when they purchase dividend stocks for income. There’s a tradeoff. They simplify the investing process by averaging into quality businesses but risk having a higher average cost for their dividend investment. Consequently, a higher cost leads to a lower initial dividend yield (and lower subsequent yield on cost when the dividend stocks increase their dividends).
How do you tell a dividend stock’s valuation?
Some investors do not know how to value dividend stocks. Understandably, there isn’t a clear-cut formula to determine if dividend stocks are undervalued, fairly valued, or overvalued. Too many factors come into play, including the stability of the business’s earnings or cash flow, the historical valuation, the growth rate in the future, the safety of the dividend, etc.
If you’re not sure about how to determine if a stock is cheap or not, use the analyst consensus price target as a guide. Although sometimes there are big changes for these price targets after an earnings report, it’s still better than ignoring the valuation factor altogether.Read More