Tuesday, November 28, 2023

Finding Fair Value Stocks To Consider For Your Dividend Portfolio

The concept of fair value is really quite simple. Given a few select inputs such as dividends, dividend growth, holding period, discount rate and few others, one can easily calculate the fair value of a stock. As with most simple things, the devil is in the details – the inputs must be correct to calculate a reasonable fair value, otherwise, garbage in, garbage out.

Many Dividend Growth Stocks are trading on the pricey side based on their historical metrics and on their dividend fundamentals. A bull market is not the friend of a long-term investor that is in the accumulation mode. Advancing stocks makes us feel good today, while cheap stocks will make us feel good in the future.

That is not to say that all dividend stocks are overvalued today. There are still bargin-priced dividend stocks available. However, to find them we may have to dig and scratch more to uncover them. A little time and diligence will reward the patient investor.

I calculate Fair Value weighing The Mid-2 Price and the NPV MMA Price. The weight depends on where we are in the cycle. The Mid-2 Price considers four fair value calculations, Avg. High Yield Price, 20-Year DCF Price, Avg. P/E Price and Graham Number, the highest and lowest fair values are excluded and the remaining two calculations are averaged to calculate the Mid-2 price. The NPV MMA Price is where the NPV MMA value equals the NPV MMA target. See Fair Value for more detailed information.

A successful dividend growth investor is not solely focused on valuation. We must also consider dividend fundamentals and dividend growth sustainability. When a stock appears to be under-valued it could mean the market has lost confidence in it. If the market is wrong and we are not too fearful to buy, a handsome reward is likely to come our way.

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