Author Topic: Dividend Investing Question  (Read 4699 times)

Scottma

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Dividend Investing Question
« on: January 24, 2013, 09:44:19 AM »
I'm totally green to investing, so I'm going to ask some very rookie and probably dumb questions. For those still reading...I very much appreciate your help!

So I was doing some research this morning into how dividends work. From what I've seen when considering a company to invest in for dividends you have to take into account how much is typically paid out in a dividend and how frequently dividends are paid out. Then I concluded that you'd want to consider what you're paying to obtain those dividends (ie. the stock price) to ensure you are getting a good return on investment.

During my research I stumbled on a company called Pitney Bowes (Company website: www.pb.com/careers/; Google Finance: http://www.google.com/finance?q=NYSE:PBI). They are currently selling at a low stock price ($12) and have consistently paid out around 37c to 38c per quarter since 2010. They also have a history of paying out high quarterly dividends since 1998.

So in trying to figure out the annual return on buying PBI from dividends, I calculate it to be 4 times 38c divided by $12 per stock for a return of 12.7%. Is my math correct?

So, that seems like a great return at its current stock price. Assuming I'm trying to assemble a balanced portfolio, it would seem to make sense to purchase some of this stock purely from the dividend point of view. Now, given their business model, it seems that their stock price peaked a long time ago, so I wouldn't be looking to buy this for returns through increased stock price. (They sell postage scales, which would have been a new technology in '98 when they experienced their highest stock prices - I expect there will always be demand for postage scales, but not growth in the industry...).

So am I missing something here? Or does this appear to be a good (hypothetical) investment?

gecko10x

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Re: Dividend Investing Question
« Reply #1 on: January 24, 2013, 10:34:03 AM »
There's a reason PBI is trading at a P/E of 6.1... their earnings have been falling and they have no growth prospects. I'd expect them to cut the Div in the next 1-3 yrs if their earnings don't pick up dramatically. Last year's Div. was a 76% EPS payout.

KingCoin

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Re: Dividend Investing Question
« Reply #2 on: January 24, 2013, 11:46:14 AM »
You can save yourself some trouble and just look at the "Dividend Indicated Gross Yield" line item on most financial websites (though it worth running through the math a few times to be sure you know what it means).
http://www.bloomberg.com/quote/PBI:US

Stocks with north of a 6% dividend yield usually have few growth prospects (utility companies are a typical example). Stocks with double digit dividend yields are usually troubled in one way or another.

tooqk4u22

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Re: Dividend Investing Question
« Reply #3 on: January 24, 2013, 12:04:00 PM »
So am I missing something here?

Yes you are - you are missing basic financial analysis. 

I took a quick look - rapidly declining income (last year was up due to some settlement), high leverage and high pay out ratio so there is no reinvestment potential unless the divi is cut.  And lets not forget that the USPS is struggling because mail volume continues to decline every year. 

That is just a primer and doesn't mean that PBI is going under or if its a diamond in the rough - and is more to demonstrate why the yield is so high.  Bottom line is that management is making the right call by continuing to pay out the divi.

The question you have to figure out is can this company stop the bleeding and reinvent itself or is it too late (a la kodak and xerox).

Khan

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Re: Dividend Investing Question
« Reply #4 on: January 24, 2013, 02:09:42 PM »
Another thing that(may or may not) be an issue to your knowledge, stock price alone does not make a stock "low or high" priced. Sure, one share of Apple is ~500 dollars, but a close company in scale terms is GE or Exxon. GE has a share price of 22$ compared to a market cap of ~230bn, and Exxon has a share price of 92$ compared to a market cap of 416bn. Apple has a share price of 450$ currently compared to a market cap of 423bn.

So Exxon has an market cap almost the same size as Apple's, the reason Apple's has a higher share price is fewer outstanding shares. You could still buy the same $ amount of shares and own approx. the same % of the company.

I didn't do any research myself into PB, as it seems the other two already did that for you.

tooqk4u22

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Re: Dividend Investing Question
« Reply #5 on: January 25, 2013, 10:11:22 AM »
PBI recently floated some 10yr senior notes that are trading around 5% - those look far more compelling than the equity shares right now - of course more research would have to be done.

Nords

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Re: Dividend Investing Question
« Reply #6 on: January 25, 2013, 10:40:49 AM »
I'm totally green to investing, so I'm going to ask some very rookie and probably dumb questions. For those still reading...I very much appreciate your help!
So am I missing something here? Or does this appear to be a good (hypothetical) investment?
I think you need to hold on to your wallet while you do a bit more reading.

First I'd recommend Rick Ferri's blog on passive index investing:  http://www.rickferri.com/

If, after you've read that for 30 minutes, you still feel like investing in dividend stocks, then read the Dividend Growth Investor's blog and follow his analysis.  No need for you to recreate the math path already trod by thousands of analysts (and bitter experience):  DividendGrowthInvestor.com

Once you've dealt with your stock lust (whichever way you decide to go) I'd recommend reading about asset allocation on the Bogleheads Wiki:  http://www.bogleheads.org/wiki/Getting_Started
« Last Edit: January 25, 2013, 10:43:07 AM by Nords »

Scottma

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Re: Dividend Investing Question
« Reply #7 on: January 25, 2013, 02:57:05 PM »
Thanks for the replies everyone. I should have been more clear in my post - I'm not actually interested in buying this or any other stock. My real question was in how to calculate return for an investment made for dividends. I should have just left off my last question about it being a good investment...sorry about that!

Thanks again though for the thoughtful responses. I do have a vast amount of reading to do, and until I can get it done I'm sticking with Vanguard index funds to play it safe.

tooqk4u22

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Re: Dividend Investing Question
« Reply #8 on: January 31, 2013, 02:05:54 PM »
PBI is up 20% today because the company beating revenue and earnings estimates, which declined by 1% and 57% respectively - but analysts expected worse so the stock rallied. 

Still the company is obviously heading in the wrong direction just a tick slower than expected.

Spork

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Re: Dividend Investing Question
« Reply #9 on: January 31, 2013, 02:23:05 PM »
Thanks for the replies everyone. I should have been more clear in my post - I'm not actually interested in buying this or any other stock. My real question was in how to calculate return for an investment made for dividends. I should have just left off my last question about it being a good investment...sorry about that!

Thanks again though for the thoughtful responses. I do have a vast amount of reading to do, and until I can get it done I'm sticking with Vanguard index funds to play it safe.

I can tell you how I do it.  I will give you the warning that it is probably technically incorrect.  I am not an accountant.

I create graphs for pretty much anything and everything financial -- my own personal obsession.  I graph "ROI Factor", which is 
($value + $dividend) / $cost;

I.e: an ROI factor of 1 is "even money".  An ROI factor of 2 is "double your cost".

Again: I doubt that is correct in any accounting sense of the word.