Thursday, October 6, 2016

Use DBS Group Holdings Ltd to show dividend and share price relationship

In this blog post, I will use DBS Group Holdings Ltd (as a proxy of the stock market) to show dividend and share price relationship to determine undervalued and overvalued market.

There is no sure way of knowing the exact point when the stock market peaks or bottoms out.

However, if you use the dividend and share price relationship, you can have a good feel of the current market.

Overvalued market means the share price is too high for the value of the stocks.  If you buy at this time, you will overpay for the shares.

Undervalued market means that the share price is very low, and you use lesser money to buy the great stocks.

How do you use the dividend and share price as a guide?

The following is the price chart of DBS Group Holdings Ltd from 2008 till now.


The credit goes to Yahoo! Finance

The share price of DBS Group Holdings Ltd reached a high point of $20.48 in 2008, and dropped to a low of $6.90 in 2009.

The price range in 2010 was rather stable from $13.50 to $15.50.

In 2011, the share price fell below $12 for a short period.  From then on, the trend was uptrend until the share price hit a high of $21.40 in 2015.

As we can see from this chart, the share price goes up and down.

Next, we check the dividend of DBS Group Holdings Ltd.  The data is taken from SGX website, under corporate action.


We will see from 2009 onwards

Unlike the share price, the dividend is more stable.  For many years, the annual dividend is 56 cents (except in 2010 where it is 14 cents lesser).

From 2015, the dividend increased to 60 cents per share.

Now let us see the dividend and share price relationship.

2009 was a very volatile year.  If an investor bought the share at $6.90 and based on the average dividend of the year, the dividend yield would be 8% (dividend of 58 cents divided by share price of $6.90).

If you bought at $15 in 2010, and based on the dividend of 42 cents, the dividend yield would be 2.8%.

If you bought at $12 in 2011, and based on the 58 cents dividend for the year, the dividend yield would be more than 4%

A summary is given below.

Year
Dividend
Share price
Dividend Yield
2009
$0.58
$6.90
8.41%
2010
$0.42
$15.00
2.80%
2011
$0.58
$12.00
4.83%
2015
$0.60
$21.40
2.80%
2016
$0.60
$14.00
4.29%

Based on the dividend and share price relationship, a dividend yield of 2.8% means that you have bought into an overvalued market.

If the dividend yield is 4% to 5%, that is a balanced market.

An undervalued market happens when the dividend is stable, and the share price is driven down by fear.

Since the share price rises and falls all the time, and the dividend is stable, you can use dividend as a guide to determine the current situation of the market.


No point buying into an overvalued market.  Best to wait till the market is undervalued.

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