Finding Value: Determining The Equity Bond Rate From Shareholder Yields

Self-directed stock investors can and should measure shareholder yields beyond just dividends. When researching stocks for inclusion in my family portfolio I consider a company's returns to shareholders as a leading barometer of the worthiness of owning a slice of that business.

I measure the average of the sum of yields per share on trailing earnings, free cash flow, and dividends and then weigh against the 10-year Treasury rate.

The proprietary equity bond rate modeling gives me a sense of whether a stock is worthy of the assumed higher risk profile compared to the allegedly safer intermediate-term government issue.

Here is an alternative methodology to confirm whether your stocks’ shareholder yields are collectively exceeding the 10-year Treasury rate without the limitations of the dividend growth strategy or the risks of high yield dividend investing.

Shareholder Yields as the Equity Bond Rate

A simple definition of a stock's equity bond rate is how its yields compare to the rates of government-issued bonds. Dividend yields are the typical comp, but I also use two other metrics to measure a stock's current return to shareholders.

Earnings Yield

Earnings yield is the annualized trailing GAAP earnings per share divided by the most recent stock closing price. I view earnings yield, the inverse of the price to earnings ratio as the equivalent of a stock's equity bond rate or how a company's earnings compare to the 10-year Treasury rate, which was yielding 2.75% as of this writing.

Thus, I am looking for stocks with earnings yields exceeding 5% or at least 225 basis points (two and a quarter percentage points) above the current 10-year Treasury yield. Targeting earnings yields above 5% is the equivalent of price to earnings ratios below 20 times.

Naturally, the higher the earnings yield (and lower the P/E ratio), the more out of favor the stock appears with Mr. Market. Nevertheless, as a value investor, quality enterprises with high earnings yields get my attention for further research.

1 2 3 4
View single page >> |

Disclosure:  My family portfolio is long AEO, DKS, and KSS.

Copyright 2019 by David J. Waldron. All rights reserved, worldwide.

Disclaimer: 

David J. Waldron's ...

more
How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.