Dividend Yield, Price to Earnings or Price to Book, Which Matters More?

financial-ratio

29 Aug Dividend Yield, Price to Earnings or Price to Book, Which Matters More?

Dividend stocks are a popular way to create income, but how do investors choose which stocks to buy? Both dividend yields and valuation ratios such as Price to Earnings and Price to Book Value are used to determine stock selections, but which matters more?

Dividend Yield

Dividend yield is basically calculated by taking the annual dividends per share and dividing it by the share price.

dividend-yield-formula

In general, the higher dividend yield, the ‘cheaper’ the stock and the lower the yield, the more ‘expensive’ the stock is. For retirees, dividend yield can be thought of as the rate of income return, similar to fixed deposit and bond interests.

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So you could compare 4% yield stock to 1% fixed deposit to 3% yield bonds when trying to determine retirement income. The dividend yields on Singapore stock exchange ranges between 0% and 10.47%.

The high yields look really attractive, but is simply going after the highest dividend yield stocks the way to go?

Price to Earnings and Price to Book Value Ratio

Price to earnings ratio is calculated by taking the stock price and dividing it by the earnings per share.

price earning ratio investing ratio you need to know

Price to book value is calculated by dividing the stock price by the book value.

Price to Book Ratio

Both P/E and P/B ratios are generally used as valuation metrics. the lower P/E the cheaper the stock is and vice versa.

 

model porfolio returns

Business Times constructed a 10-year comparison between the STI, Top 20 dividend yield, Top 20 lowest P/E as well as Top 20 lowest P/B.

The benchmark STI returned 126% for the last 10 years while the high yielding portfolio returned 378%.

Interestingly, the P/E portfolio returned a higher 787% and the P/B portfolio returned a whopping 6,861%! So while it is fine to chase after dividend yields, valuation still matters.

Buying cheap stocks is still the key to generating high returns.

 

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2 Comments
  • Amar
    Posted at 17:08h, 30 August Reply

    I wonder if you have the link for this statement :
    Business Times constructed a 10-year comparison between the STI, Top 20 dividend yield, Top 20 lowest P/E as well as Top 20 lowest P/B.

    Tried to google it but couldn’t find it.

    Thanks

    • Alvin Chow
      Posted at 09:56h, 31 August Reply

      I believe Business Times no longer host the pages anymore, and they are largely written by ex-journalist, Teh Hooi Ling. You can probably get her books, Show Me The Money series, which cover a lot of such research.

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