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I’M NOT A SAVVY investor, nor do I pretend to be. Some people get paid to analyze and make predictions about stocks, often for people like me. How reliable are their opinions? I’m not so sure.
Take the newsfeed about my largest single stock holding, the utility Public Service Enterprise Group (symbol: PEG), that I got late last month from my Fidelity Investments account:
“Guggenheim Downgrades Public Service Enterprise Group to Neutral From Buy, Adjusts Price Target to $61 From $64. MT Newswires · 11:21 a.m.”
“The Analyst Landscape: 7 Takes On Public Service Enterprise. Benzinga · 11:00 a.m. The 12-month price targets, analyzed by analysts, offer insights with an average target of $63.71, a high estimate of $70.00, and a low estimate of $61.00. This upward trend is apparent, with the current average reflecting a 1.4% increase from the previous average price target of $62.83.”
What to do? Do I bet on the $70 analyst or the $61 analyst? That’s quite a range. What do these experts know that I don’t? More important, what does the $70 guy know that the $61 guy doesn’t—or vice versa?
This wide range of views on the same stock at the same time presents a good case for index funds, especially for us befuddled folk. I’ve been acquiring Public Service Enterprise shares for more than 50 years by way of a stock purchase plan, individual purchases, employee compensation and dividend reinvesting.
I still reinvest my dividends today. Someday, after I’m gone, the dividends might supplement my wife’s survivor income. In the meantime, what actions am I going to take as a result of the analysts’ predictions? None, except continuing to reinvest my dividends in additional shares.
Now, about those dividends: It’s $2.28 per share, so the stock’s recent yield is close to 4%. Is that my yield? I say no. My yield is the current dividend as a percentage of the price I paid for my shares.
For shares that cost me $45, my dividend yield is about 5%. That will never change for those shares unless the dividend amount changes. It seems like simple math to me. But since math is not my strong point, some friends almost had me convinced I was wrong.
They said the yield is always the current yield on the current price. Yeah, if you purchased shares at today’s price. Please tell me they’re wrong.
To be honest, I see the stock market as the world’s largest casino, where logic is in short supply. Why do share prices go up? Because the value of the company is expected to increase based on growing earnings, I’m told. I’m not sure how that’s so different from expecting to hit three cherries in a row on a slot machine.
Now, if those growing earnings are shared with investors, that rising share value makes sense. What if there are no dividends or dividends aren’t increased? The word then is the company is “reinvesting in the business” so its future earnings will increase. That compels investors to bet that other investors will pay even more for the shares later because of the stock’s higher earnings.
No matter. It seems to work—for some people. But is it better than placing a bet on a roulette wheel? I wonder.
Dick, your yield is 4%.
Say you purchased 1,000 PEG shares in 1985 at $10/share for a total investment of $10,000.
The shares are now worth $60/share or $60,000 and the dividend is $2.28 per share.
If you think you are earning 22.8% on the $2,280 dividend on your $10,000 original investment, you are overlooking the fact that your are earning $0 on the $50,000 of stock appreciation!
At any time, you could sell all 1,000 shares for $60,000 and put it in any number of dividend paying stocks (or CDs or Treasuries) paying 4% and get your $2,280.
If it wasn’t this way, no sane person would ever sell a dividend paying stock that has appreciated in value.
The analysts make those predictions because nobody will pay them if they admit that they don’t have any idea what will actually happen.
If you’re interested in income stocks, the current yield is the only valid way to compare them. One of my uncles used to get upset when a stock price went up because his dividend yield went down unless the company also raised the dividend.
How could his yield based on his purchase price go down?