Some may have wondered what the link between dividend growth and value investing is. The connection does not necessarily exist in all cases. For example, an investor who chooses investments based solely on dividend yield will not consider the value aspect of the equation. Conversely, value investors who choose stocks based only on current valuation and future capital appreciation ignore the dividend aspect.

Before we go any further, it would be helpful to define value and dividend investments:

Value investing: As defined by Benjamin Graham and David Dodd, it generally consists of a system whereby the investor identifies market inefficiencies where the price of a security is below its intrinsic value, that is, undervalued. Graham referred to this market price discount from the intrinsic value as the “safety margin”. In short, intrinsic value is the discounted value of all future distributions.

Invest dividend growth: In the classic implementation, focuses on identifying solid companies that can grow their dividends every year. and the expectation that it will continue to do so in the future. The focus is not just on yield, but on a combination of yield and dividend growth. Often times, it is the lower return, higher growth, and security that will produce the best return over time.

I’ve always viewed dividend growth investing as a subset of value investing, at least the way I do. Since my first screen is to determine if a stock is a good dividend growth stock, my stock universe is smaller than the average value investor. Once a promising stock with dividend growth is found, I look at its valuation. Does it trade at a discount? fair value or with a bonus?

When determining the fair value of a share, I take into account five Calculations:

1. Average High yield price: Price calculated by dividing the current dividend per share by the average high dividend yield for each of the past 5 years (dividend per share divided by the low share price for the year).
2. 20-year DCF award: Price calculated based on the present value of the next 20 years of the dividend and the estimated value of the stock at the end of 20 years.
3. Average P / E price: Price calculated by multiplying the EPS (after twelve months) by the minimum of: 1.) 5-year average of high and low P / Es or 2.) High P / E of the last few years.
4. Graham number: Price calculated using the square root of 22.5 times the material book value per share times EPS (after twelve months). Benjamin Graham, Warren Buffett’s mentor and father of value investing, developed rules for defensive screening of stocks. This formula uses its principles to calculate the “maximum” price one should pay for the stock.
5. NPV MMA price: The price at which the NPV-MMA value equals the NPV-MMA target. The basis for calculating the NPV MMA value is a hypothetical investment of \$ 1,000 in the stocks in question and a Money Market Account (MMA) with an average rate of 20 years (I’m using a 20 year treasury as a proxy). The calculated value is the present value (present value) of the difference between the annual dividend profit of this investment and the interest income from the MMA over 20 years.

Historically, stocks that pay dividends have outperformed those that don’t. Buying dividend stocks at a discount is how Turbo charging your return!

Full Disclosure: No position in the above securities.

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