I didn’t have time to complete a post last week, but I did finish going over the notes I’d taken in The Dividend Investor. So here is what I learned from those final pages, along with a short overview of IPOs, the key figures to mine from annual reports, and what my plan is now that I’ve learned the basics.
Sometimes, when a company is set to make a positive announcement, the share price will jump up before it has even been made. But, usually the share price will fall back down again a bit after the announcement has actually been made, so it is best to wait to buy then, as opposed to when the price is still inflated.
Rights Issues
A rights issue is when a company you are already invested in offers you - and all of the other existing shareholders - the right to buy more shares, typically at a price lower than that of the stock market. From what Rodney says in the book, as well as what my dad told me when I asked him about them, it is usually a good idea to take the company up on their offer if you can, with a view to selling your entire stock in the company soon after - say within the next year or two, at a time when you’ll make a profit - since rights issues can be an early warning sign.
IPOs
I wasn’t sure whether an IPO was the same as a flotation; I’ve found out that an IPO is a method of flotation. I think it’s the only method to be particularly concerned about… Apparently Yahoo Finance provides comprehensive information on upcoming IPOs (see IPO Watch), and I’m sure it’s also the website my dad uses to stay up-to-date with the stock market goings on.
Rodney recommends, if you’re interested in buying into an IPO, waiting for a week or so after the shares have been floated to benefit from the price settling down a bit.
The Key Figures to Mine from Annual Reports
When it comes to companies’ annual reports, Rodney recommends finding, or creating if necessary, a table comprising three rows of figures from the past five years: 1) basic earnings per share (EPS); 2) adjusted EPS; and 3) final dividend.
Using that, calculate the percentage change of each row from one year to the next. Ideally, these percentages will be consistently positive and greater than inflation. We can then use these percentages to guide us in calculating a prospective dividend - once I’ve started doing this myself I’ll explain how in more depth, because it will be company dependent.
Our table will also allow us to calculate dividend cover for each of those five years - adjusted EPS divided by the dividend. We are looking for it to be around 2 or 3 year on year.
With our estimated prospective dividend, we then want to calculate prospective yield - prospective dividend divided by the stock price multiplied by 100%. My understanding is that if the prospective yield turns out to be less than or equal to the highest interest rate being offered by a bank on, say, a fixed-term savings accounts, there’s no point investing in the company, as you would be better off putting your money into that savings account, since it is completely risk-free. If you live in the UK Martin Lewis provides comprehensive information on what the top savings rates currently are, which are around 5-8% at the time of writing, so it follows that it would only be worth investing in a company if its prospective yield was at least, say, 10%, and the higher the better…?
The last important figure to calculate is forward P/E: stock price divided by the expected EPS. Companies are required to provide investors with the expected EPS for each upcoming quarter. I looked into this more on Investopedia, and found out that the S&P 500’s median P/E is around 15, and my understanding is that a P/E lower than that indicates a company is undervalued, while a P/E higher than that indicates a company is overvalued… But apparently a high P/E can indicate that investors expect the company to have higher growth than the rest of the market…
My Plan Going Forward
I think I’ve learned most of what I need to know to begin looking into individual companies. Rodney states that we should aim to invest in about 12 different companies - a mixture of, say, British and international - so that our portfolio is balanced and diverse, while keeping an eye on another 12 in case we need to make a swap for whatever reason. So I’m going to start by trying to find 24 companies that meet the following criteria:
Percentage change of adjusted EPS and dividend consistently positive and greater than inflation over the past five years;
Dividend cover consistently hovering around 2 to 3 over the past five years;
Prospective yield at least 10%;
Forward P/E around 15 or lower.
To begin, I’m going to look into companies on the FTSE4Good Indices - since I want to try to contribute to the good in the world as opposed to humanity’s downfall - and then the FTSE Small Cap, and Fledgling, since I lean towards investing in small and medium sized companies - and will probably be more likely to afford to.
I might use a stock screener. Rodney points readers to ADVFN’s, along with others, but ADVFN’s is the only one I found working, probably because the book was published in 2012 and so its links are out of date. To access it, go on to the ADVFN website, hover over Menu, next to the blue Subscribe, and click on Filter X under Tools, then click on Start Filter X. I think you have to register before you can access it, but it’s free. (Rodney says so in the book so I already had before I worked out how to get onto it.) I’ll try it out next week.
Once I’ve selected my 24 stocks of interest, which could take me who knows how long, I’m going to open a DIY stocks and shares ISA with Trading212 - as recommended by Martin Lewis. I’m also going to set up Stop ‘Sell’ orders at the price I pay for any shares initially so that it is impossible to actually lose any money. We’ll see if that works out…