Wednesday, September 10, 2014

Does Price Matter?

Brain Churn
While reading Dividend Mantra's Price and Value post a question popped in my head.  If I was new to investing and had say $1000 dollars to invest would it be better to buy 10 shares at $100 of a company or 100 shares of a different company at $10?  Some assumptions to make were each grew at the same rate for the dividend growth rate and the companies were equally valued (qualitative and quantitative.)  The reason for this is as a beginning investor my capital is sometimes limited so I want to buy valuable stocks but also want my portfolio to grow as fast as possible.

Using one of my favorite tools for screening I turn to the U.S.DividendChampions spreadsheet maintained by Dave Fish.  I thought about what price range would be attractive to newbies and what price would be hard for them to bite at.  The prices chosen were $20 or less also known as the "cheap stocks" and those that were priced over $80 "Who wants to own just 1 share."

Sorting through all 553 Champions, Contenders, and Challengers these were the averages to use in the calculations.
Stock Price
Average Price
Average Yield
Average Dividend
Average Dividend Growth Rate
<=20
14.77
3.63
.51
8.9
>=80
124.90
1.93
2.35
15.1

Now before you read further take a guess who will come out ahead in 10 years and then after 20 (hint.)

I turned to one of the calculators on www.buyupside.com.  So with a thousand dollars lets buy some stocks and see how that investment looks over 10 years.  For simplicity I kept the stock annual growth rate the same.  The goal is to show the power of dividend compounding in conjunction with the entry price.

Cheap Stocks (10 years)



Who wants to own just 1 share (10 years)


The cheap stocks win!  Their value after ten years of reinvesting is $2,468 vs. $2,235 for the high priced stocks.  To be honest that was a toss-up in my mind before running the calculation.  High yield but a lower dividend growth rate against the higher priced stocks with a lower yield but a good DFG of 15.1.  My guess for 20 years would be that the big boys overtake the cheapsters. 

Cheap Stocks (20 years)


Who wants to own just 1 share (20 years)


This time around the big guys (Who wants to own just one share?) win.  $7,273 vs. $7,909.  You can see this in the annualized return as well.  The big guys outperformed the by .47%.  Give it another ten years and the difference between the two will grow further.  My only concern is that a 15.1 growth rate on the dividends is pretty high to last multiple decades.  I suppose if you actively maintained your portfolio and dropped any that lagged and bought newcomers you might achieve this.  The 8.9% for the cheap stocks is much more realistic.  Plus you get the high yield. 

Conclusion
So does price matter?  I think the answer is no when you exclude the stock price annual growth rate.  And as dividend investors we don't care about price, right?  We buy and hold those lovely shares and collect the dividends they produce.  So for us what does matter is the entry point yield and the dividend growth over time.  Having that initial dividend income and watching it grow and compound is a magical sight.  I continue to do these types of scenarios to keep me on the path.  Right now I don't see much action but in 10+ years it will be awesome.


So depending on your retirement horizon you could break that down further.  Entry point yield is more important and will produce higher returns if your horizon is around 10 years.  I did not look to much into the industry for the cheapsters.  Might be a topic for the future. For longer periods favor stocks with higher dividend growth rates.  Surprisingly those appear to be the higher priced stocks as well.  Correlation?

6 comments:

  1. Great post and love the look of this site. I think price matters to an extent but not overall in the long run. For me, I invest partially for income (dividend income) and partially for gains, with a focus more on income. So price does matter to me to an extent but my timeline is so long that price fluctuations in the short term don't really matter much

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    1. Thanks Dan for the feedback. Yes to an extent price does matter. I think the stocks that have a high DGR probably also have a increase is stock price as well. If EPS rise fast than chances are DGR will rise proportionally. If not maybe the stock isn't worth buying.

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  2. Thank you for your experiment. It was interesting to see just what the end results will be. As a new dividend growth company, I'm more focused on accumulating ownership into blue chip type stocks initially with very little risk and then delving into long term growth companies.

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    1. Yeah good to start with a solid foundation and then take some risk after. Good point Agent. Thanks for stopping by.

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  3. Hmmm... I think price does matter. Because with investing, all we're trying to do is figure out what something is worth and paying less for it. And I think your reason is good! If you're happy with the entry point/dividend yield, then that's great. There isn't one exact price, but price varies from person depending on their own objectives I think. Great post, thanks for sharing!

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    1. Hi Henry. Yeah I need to learn more about figuring out the fair price for stocks and how to use that in my decision. So much to learn so little time.
      Later,
      DFG

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