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Ideas for Income Investors. High Dividend Stocks, Mutual Funds etc.
Professor Aswath Damodaran's Dividend Stocks Screen (Dividend Stocks 101 Series)
Posted by: Mark Lin (IP Logged)
Date: November 8, 2012 04:58PM
Aswath Damodaran is a professor of finance at NYU Stern. He is the author of several widely used academic and practitioner texts on valuation, corporate finance and investment management and is regarded as an authority on the subject of valuation.
He has also written books about investing, notably "Investment Philosophies" and "Investment Fables." In Chapter 2 of "Investment Fables: Exposing the Myths of 'Can't Miss' Investment Strategies," he questioned the conventional wisdom of selecting stocks solely on high dividend yield. He say that dividends, unlike coupons on bonds, are not promised cash flows. A dividend that is too high, relative to the earnings and cash flows generated by a company, is unsustainable and will have to be cut sooner rather than later. Also, high dividend payouts often translate into low expected growth rates in earnings.
Previously I have written an article on "Why the High Dividend-Yield Screen Fails," where I share similar thoughts with Professor Damodaran on the perils of screening and selecting stocks purely on high dividend yield.
He suggested the following improvements to the traditional high dividend yield screen:
- dividend yields > 4%
- dividend payout ratios< 60%
- dividends< FCFE
- expected EPS growth > 4%
The following stocks passed the Damodaran Dividend Stock Screen:
Stocks Discussed: BOH, BMO, FMER, GRMN, HBC, DCM, TAL, TEO,
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