We hope you’ve been enjoying our investment series as much as we have enjoyed researching and writing about it. There’s so much more content to share with you guys, so stick with us! This week we’re talking about the difference between being a value investor and a dividend investor. Which one do you think you are…
When you think of the value investor, you may think of Warren Buffet (however he is also a growth investor, but we’ll cover that later). Yes, this bloke has made an absolute FORTUNE by identifying stocks that are undervalued. He is especially known for his work with Berkshire Hathaway who’s stock has increased immensely over the past 50 years, trading at a current price of $219,900 USD per share (no, that is not a typo). So, how does one find an intrinsic value of a stock? There are a few applications so be ready to get your eyes dirty with numbers. But don’t be so rash, there’s more to just numbers here. You’ll want to ensure the company you’re looking at investing in is actually good quality and is something that interests you. You’ll want to check our their dividends, cash flow, book value, and other financial ratios to help you make your decision. Discounted cash flow analysis is one way to value a company’s share price however, be ready to make a few assumptions on the numbers here. This is probably one of the more complex tools to use so you’ll want to read up on it thoroughly and take your time going through the steps. Perhaps you’ll want to start with something a bit more simple however. Looking at the PE ratio (price to earnings) and comparing this with the industry PE is a good place to start. For example, say you are looking at a tech stock trailing on a PE ratio of 20 while the market is trailing at a PE ratio of 35. This may indicate the tech stock could be undervalued by having a low PE ratio compared to that of the market.
If you’re more interested in the dividend a stock gives, then you may prefer dividend investing rather than value investing. It’s important to be aware that some stocks will not pay dividends. One of the great things about investing in dividend stocks is compounding and being presented with the opportunity to then reinvest your dividends back into the company for more stock. As dividends also provide a second source of income, these stocks are pretty appealing to the young generation and those coming up to retirement. So, how should you choose a dividend stock? Here are a few things to look out for:
- The firm has a long history
- This indicates reliability. For example, BHP (even though their stock price has seen quite their share of volatile days this year), was one of the first companies to be listed on the ASX – all the way back in 1885. BHP however, is known for their fully franked dividend, currently yielding a nice 5.4% (as of this week). If you’re not sure about this fully franked business, well basically if a firm offers a fully franked dividend, it means the firm has already paid tax on this. Therefore, you as a shareholder are entitled to a credit for the amount of tax the firm has already paid. So, look out for these franking credits people!
- Invest for the Long-Run
- Think long-term! If you’re more of a short-term investor then value investing is your better option. But, if you’re chasing dividends, pick companies you like and think will be in the market in another 10 years or so.
- Diversification is key
- We’ve raved on about this before in our previous articles, but it still needs to be addressed here. Diversify your portfolio. It’s as simple as that. Choose stocks from different industries, different products, management styles, whatever it may be. You may also want to stay away from mimicking the S&P200 or S&P500 to be able to achieve different and better results.
- Keeping it Simple
- It doesn’t take a genius to be good at investing in the share market. More often than not, we tend to over-complicate our investment decisions. If you have a clear goal in mind and have a set criteria you look for, you’ll find it’s actually quite simple to expand your portfolio.
*Please note though, that just because a stock may have a high dividend yield, doesn’t mean you should invest in it. Take into consideration other factors when making your decisions!
Next week, we’re going to share with you our own investment journey – which stocks we’ve got in our portfolio, why we chose them, and what we’re looking at next!