No matter how simple I keep saying our investing strategy is, we still need to look at the numbers. I’m sorry, I promise I'll keep it basic here in order to not scare anyone off. I'm going to use Coca Cola as an example here and show you where to find basic stock information. I'll go over some simple stats, and then I'll post another article for a more advanced take on how to pick stocks (it will never get too crazy). I’ll use a snapshot from Google Finance below to go over the basics. I hate when people tell me to Google things, but if you Google any stock name you’ll find most of this information on any site.
#1 Stock Price. Of course, the first thing we see is the price of 1 share of stock. This price shouldn't be compared to the stock price of any other companies. I'll use Coke (KO) and Pepsi (PEP) as an example here. Just because Coke costs $41.96 per share doesn't mean it's "cheaper" than Pepsi at $98.95 per share. You just can't make that assumption with price alone. In this regard, prices are driven by supply and demand and cannot be compared to other companies at all. In the next article, we’ll talk about how you determine which company is a better value at their respective prices.
#2 P/E Ratio. This is obtained by dividing the PRICE by EARNINGS PER SHARE (EPS). So in this example, it displays the P/E ratio as 26.90. If we wanted to calculate it on our own it would be $41.96/1.56. The 1.56 represents earnings per share over the last 12 months. As general guidance, we look for our P/E ratios to be 30 or under. The companies we look for are stable earners so they tend to be lower on the scale. Rapidly growing companies like Netflix and Twitter will usually be much higher than 30, since people are willing to pay for POTENTIAL earnings on newer, expanding companies.
#3 Number of Years of Dividend Increase. Before we look at anything else, it’s a good idea to check out the dividend list (link below), which contains every stock that has increased its dividend for at least 10 years consecutively. We don't want companies who didn't maintain their dividends through the stock crash in 2008, because they will tend to be more risky. We should always expect recessions to occur over the long term, so it’s useful to see the companies that were least affected by the last recession. The list goes all the way up to companies that have paid 50+ years in a row, and that's where you tend to find the most valuable dividend stocks. It doesn't necessarily mean the best companies are at top, you'll find great companies sprinkled through the list and 10 years is a reasonable cutoff for our purposes. You'll find KO (Coca Cola) on the list with 52 consecutive years in the books. This won't usually show up on stock evaluation pages, so you should keep this list handy for reference when evaluating your potential stock choices.
#4 Dividend Yield. You can see this in the screenshot as 0.33/3.15. This means that quarterly, you will get paid 33 cents per share you own, and at the end of the year you will have been paid 3.15% of your investment in dividends just for owning your shares. We look for dividends anywhere in the 2.5-4.0% range, usually, but there are always exceptions to the rule. You'll see plenty of companies where this is blank, which means they don't pay a dividend at all. Based on our strategy of Dividend Growth Investing, we won't consider companies that don't pay out any dividends.
#5 Mkt Cap. The amount of shares multiplied by the share price. This isn't particularly important beyond we'd prefer a large market cap, probably over about 5 billion. We don't want companies that are at risk for collapse or dividend cutbacks. This is a relatively loose restriction compared to others, as some steady dividend payers have a lower Market Cap. We'd recognize their consistency, and evaluate them fairly, but always know they aren't as safe as a giant company like Coca Cola.
Those 5 things will get you well on your way to understanding what you are looking at on a stock summary page. In the beginning, I'd suggest picking 4-5 stocks that have good numbers in these categories and have a long history of paying their dividends, and contribute to them regularly. If I were just starting out, I would evenly distribute 20% of investment money to each of 5 stocks for at least the first few months. All of us are going at our own pace, so it’s hard to list any suggested amounts here. The more we diversify the better, and there are plenty of strong companies out there, but there's something to be said for a simple, safe strategy when we are getting into a rhythm and learning about the market.
Notice I didn't mention anything about evaluating what price you are buying at. For those of you who aren't interested in math, that might be too complicated to worry about at this stage, barring some huge price increase, which we don't anticipate in these steady companies. It might happen to a company like Amazon or Apple, but unlikely to happen to a company like Coke after so many years of stability. For those of you who ARE interested in some more math, read onto Advanced Stock Valuations!
Some quick potential questions answered:
What do you mean price isn't important?
When you are starting out, price isn’t as important as picking solid companies. Companies that are steady dividend payers are not necessarily going to experience the huge ups and downs of the typical stock. The most important part of all of this is getting some money into the market by choosing consistent dividend payers and companies we know well. Coca-Cola will continue to pay you a nice dividend whether you buy a share for $41 or $45. In a more advanced article here, we'll examine how you analyze the value of stock price. Once you get your savings plan rolling, and a nice long watch list of stocks that meet your criteria, then you can pay more attention to the stock price movements.
How do I get started?
If your eyes have glazed over from all this numbers talk and you know what you want to buy, head over to this article to open a brokerage account and get started!
Post any questions I might be able to answer below! I'm also curious: for those who have started investing already, what was your first stock purchase? Did it work out? Do you still own it?