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.
Happy Thanksgiving Day, Canadians! Our American neighbours will be celebrating Thanksgiving on November 25. This is due to Thanksgiving was originally set for celebrating good harvest and since Canada is more up north, Canadian farmers would harvest sooner.
While enjoying stuffed turkeys, it’s a good time to reflect on things we’re grateful about. In terms of dividend stocks, I’m thankful to have the following holdings in my portfolio. I also want to thank you for reading this blog. :3
I used to trade in and out of stocks, looking for quick profits. More recently, I was able to refrain from selling my Fortis (TSX:FTS)(NYSE:FTS) stock even though I knew it was fully valued at the time. The thing about investing is there’s no absolute right or wrong answer. The path is only clear in hindsight.
I remember last time I traded out of Fortis stock, it did pull back. But eventually, it worked its way steadily higher. That’s the type of business it is. If you’re looking for a dividend stock that will increase its dividend year after year, Fortis is a solid pick, as a regulated utility that earns stable and predictable returns.
I’m thankful that Fortis stock remains a part of my dividend portfolio. And if it becomes cheap enough again, I’ll pick some more shares up if I have excess cash. It’s the kind of dividend stock that doesn’t require much monitoring.
Utilities are a key component of solid dividend portfolios. Here are 3 utilities that provide current yields of about 3.5-4.4%. They’re fairly valued. Going through these examples will lead to an answer for the question in the title.
Brookfield Infrastructure Partners L.P. (TSX:BIP.UN)(NYSE:BIP) split-adjusted funds from operations per unit (“FFOPU”) increased by 2% in 2020 during the pandemic, proving itself to be a defensive business in the face of adversity.
In the first half of the year (“H1”), BIP rebounded to growth with its split-adjusted FFOPU rising almost 19% to US$1.77. Contributing factors include an economic rebound, management taking advantage of market volatility during the 2020 pandemic market crash (such as by scooping up shares of Inter Pipeline (TSX:IPL) at basement prices), capital recycling, etc. Its H1 2021 payout ratio was 58% of FFO, which is a healthy payout ratio.
BIP remains one of our favourite utilities for income. We trust that management can live up to its word by increasing its cash distribution by 5-9% per year going forward.