The market pundits will always talk about the current dividend yield and the current PE ratio. That is great if you are considering buying a security. You should be checking those metrics - at a minimum!
But...., what if you own the security from several years back? Do those historical numbers mean anything? While the current numbers are important, you should ALSO be looking at the security from the vantage of the price YOU PAID several years back. Why?
If you bought a quality company that is growing in revenues, earnings per share and dividends per share, the PE on purchase price will decrease and the dividend yield on purchase price will increase.
Below is an example of the general idea you should understand. Admittedly, it is not perfect, but it addresses the general idea.
Let's say you paid $100 for a stock earning $10/share with a dividend of $5.5. The P/E would have been 10 (100/10) and the dividend yield would have been 5.5%. The purchase occurred 5 years ago. Earnings have been increasing 10% a year. So, five years later, it is earning $16.10/shr (10*(1.1^5). Assuming the dividends are keeping pace, the dividend would be $8.86/shr (5.5*(1.1^5). The stock is now selling at $200/shr because it is a bull market. The now current PE is 12.1 (200/16.5) and the dividend yield is 4.4% (8.86/200).
Someone suggests selling it and replacing the stock. First, do you still believe in the success of the company? If you don't believe in it, maybe you should sell. Second, if the current management is showing a good track record and continuing to grow earnings and dividends, maybe you shouldn't sell.
Given the price you paid for the security ($100), your P/E would have gone from 10 (100/10) to 6.21 (100/16.1) on the price YOU PAID for the stock. The dividend yield would have gone from 5.5% (5.5/100) to 8.86% (8.86/100) on the price YOU PAID on the stock.
You are getting a better PE (6.61 vs 10). The lower PE has a better margin of safety should business turn South. That is also why you should always check how a company did in the last industry downturn before you purchased it. Did they handle the downturn well? If they did, it is a good sign.
You are also getting a better yield (8.86 vs 5.5) on what YOU PAID. Compare the 8.86% to the current yield on the security of 4.4%. I personally would like more on my money than less. Additionally, considering your cost (100) will not change, as the dividend increases, the percentage yield grows even faster since the base ($100) doesn't move. That is just math.
Let's look at it another way. If you sell anything, you are looking for the return on what YOU PAID - not what the current price is in the market.
Just like a pivot table that you can "slice and dice" data metrics in multiple ways, you should also look at securities from a number of different vantages. This helps you to make smart and well-informed decisions.
