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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?
If I had such a concentrated position in one stock, I’d invest the dividends in an index fund instead of back into the same stock.
Just to clarify, it’s my largest single stock holding, not my largest holding.
I’m glad that keeping your PEG stock has worked out for you but I would have sold it for diversification purposes. My wife insisted on holding on to the stock she earned working at AT&T in the 1980s even after it was broken up. She only recently sold her Verizon stock which was her last remaining spin-off company stock. We have no idea how she fared overall, but watching her Lucent stock get wiped out was not a pleasant experience.
IMHO,the stock market is NOT a casino.
At a casino you bet on which card comes next, or the next dice roll, or which numbered slot a ball will fall into.
But you don’t own anything.
Theoretically, when you buy a share of stock, you are buying a very small percentage of that company.
Does it make a difference?
YMMV
I am truly not a savvy investor. I gave up on individual stocks years ago for reasons you mention and also because sometimes bad things happen to good companies. These days my idea of “playing the market” is just to put a little money into an actively managed mutual fund in hopes of beating the index.
I had a little Exelon stock in my 401(k) from the TRASOP/PAYSOP days, but I sold it prior to the split. I think the spin-off company Constellation opened at something like $40 and is now over $130 two years later. Shouldn’t have bet against the house.
Some of mine came from TRAYSOP/PAYSOP too.
For readers who don’t know what TRASOP and PAYSOP are — which would include me — apparently they’re a type of employee stock ownership plan.
With tax incentives for the company.
In the mid 1980s for a couple of years my company gave us something like 1/2% of our salary in stock and we had an opportunity to buy a limited number of shares at half price. When the program ended a few years after I was hired–I presume due to corporate tax law changes–we were given the option to roll our TRASOP/PAYSOP into 401(k), cash out or take it as stock. I put it in my 401(k)…all $653.
I’ve got a little PEG, which I inherited, but I never followed it that closely. Seems OK, typical utility.
The main thing about utilities is that their price is tied to interest rates. Right now, utilities are price very high for what they are, indicating that the market thinks today’s interest rates are temporary. If you will be getting 4-5% on 2-year and 10-year Treasuries for the next 10 or 20 years, then utilities should be trading at 12-14 times earnings, not 16-20 times.
Before the era of low interest rates, a stock like PEG would be trading for $38 a share, which is more than I paid for it in 2003.
Dick..when it comes to gambling, the house always has an edge. In contrast the stock market constantly appreciates over the long term..
I never got rich from my investment in Public Service Enterprise Group but “ole Peggy” was one of the few stocks that turned a profit for me during the 2008 market downturn.
regarding analysts opinions, they change from week to week.
Long term being the key words.PEG hasn’t even made it to $60.00 yet 😩