Strong beliefs in the investment world guide many investors’ portfolios. The problem is that many of them are not true. It’s time to destroy misconceptions about payout ratios, PE ratios, dividend history, and volatility.
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You’ll Learn
- What is the dividend payout ratio? What does it tell us?
- A strong belief is that a Good Payout Ratio is under 80%. Why is this a misconception?
- To illustrate his point, Mike shares an example of a stock with a payout ratio over 100% that remains a good option.
- On the other hand, does he have an example of a low payout ratio stock that you would consider unsafe?
- The price-to-earnings ratio, or the PE ratio, indicates a stock valuation. It tells investors how many times they pay for earnings.
- For many investors, the lower the PE ratio, the more attractive it becomes. However, we have to disagree and remind investors that it depends. To get a realistic view of the PE ratio, investors must compare it to comparable businesses in the same industry and consider the stock’s average.
- Vero asks for an example of a strong company with a high PE ratio and a weak business with a low PE ratio.
- Another misconception is about dividend history. Many people tend to have a biased opinion of a company because it shows a long history of dividend payments or, as we have often heard, “it has been there forever.” However, while this statistic tells how reliable the company was in the past, it doesn’t tell anything about the future.
- The same belief applies to those whose investment thesis relies highly on a Dividend Aristocrat or King title. Some of them have been in trouble lately.
- To end this episode, let’s discuss the hard-to-destroy thought that low-yield, high-growth stocks are more volatile. How can Mike prove it’s wrong?
- With that in mind, we could say that Mike believes investors should not require a minimum yield. Then, why should they enter a maximum yield?
Related Content
Here’s the episode about Wide-Moat Dividend Stocks.
Here’s Mike’s most recent analysis about BCE.
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This podcast episode has been provided by Dividend Stocks Rock.
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