Value investing

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10. Dividends

A useful additional filter is to calculate the value of a share by comparing the dividend per share (DPS) you can expect to receive from it with the interest you might expect to get on comparable investments.

If a company pays out a dividend of 50p per share, and the interest rate you could expect to receive by putting your money on deposit with a bank is 5%, the value of the share can be calculated as:

V = 50p / .05 = £10

On that basis, you would be happy to pay £10 per share, because your cash flow return would be exactly equal to the interest rate.

In practice, this calculation is only really useful when you are looking at stable non-growth stocks with fairly predictable dividend payouts. It doesn't work for companies with unpredictable dividend payouts, or for riskier high-growth companies that may not pay any dividends at all.

1. What is value investing? 2. Ben Graham 3. Does value investing suit you? 4. Back in fashion 5. Undervalued assets - introduction 6. Undervalued assets - property companies 7. Debt 8. Earnings 9. Earnings - an example 10. Dividends 11. Ratio of market capitalisation to sales 12. Warren Buffett's principles 13. Why do stocks become undervalued/overvalued? 14. Conclusion

• Value Growth Investing