Picking Dividend Shares: The Key Ratios - Their Predictive Power and Their Interdependence



When selecting a dividend share, the three numbers that a DIY Income Investor should look at first are:

• dividend yield (dividend / share price)
• dividend cover (earnings or profit / total dividends)
• p/e ratio (price / earnings per share)

To underline, this is only the starting point for doing your own research - but these are important numbers to consider, giving an indication of the likely attractiveness and sustainability of the dividend.

And recent academic research underlines the importance of these ratios in forecasting stock returns...

Batten Down the Hatches: Portfolio ETF Top-Ups

There are storm clouds on the horizon. The global economic situation is now beginning to look more and more difficult and I am gradually becoming more pessimistic.

I am hoping that the way I have restructured the DIY Income Investor portfolio will help me to weather the threatening coming storm.

Free eBook: "How to Make Money Out in Dividend Stocks"

Although I have produced my own eBook on DIY Income Investing, there are obviously others writing on topics related to this area of investing. In particular, The people at Stockopedia have recently sent me a link to their eBook on dividend shares, which they say they are happy to share.

So here is the link. Well worth a look!

Portfolio Buy: 10% Yield - Asset or Hand Grenade?

"Three shall be the number of
the counting..."
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At the risk of being repetitious: high yield = high risk.

To quantify that a little, the average yield on my portfolio usually runs at 5-6% and this is the sort of yield (and risk) that I feel comfortable with. So, to paraphrase the Monty Python 'Holy Hand Grenade of Antioch' sketch: 10% is right out (of the question).

A so-called 'free lunch' would entail getting an abnormally high yield with no consequent risk. However, given that the stock market is driven by thousands of decisions - many of which are very well informed indeed - means that this kind of situation is unlikely to arise. So unlikely, in fact, that spotting them is probably impossible.

In other words, even if you do your homework, buying anything with an abnormally high yield is a gamble - a bit like holding onto a hand grenade with the pin pulled out.

When Dividend Shares Go Bad: FirstGroup (LSE:FGP)

It's all about the business model...
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Investing is rarely straightforward, is it? No sooner have you paid in hard-earned cash for your new best choice in dividend share than the management announces that they are cutting the dividend.

This is the dreaded 'double whammy': not only is your income cut (the most important consideration, after all for a DIY Income Investor) but the share price falls. Negative equity meets the stock market.

How should you deal with this all-too-familiar scenario?

Another Boring Buy...

More of this ahead...
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Ho hum, another non-Sterling ETF purchase. This time its a top-up of my Euro dividend Exchange Traded Fund, the iShares EURO STOXX Select Dividend 30 (LSE:IDVY)

Sorry it is not any more exciting - but sometimes investment strategies work out like that, and you have to find your excitement elsewhere.

Portfolio Buy: Manchester Building Society 8% PIBS (LSE:MBSR)

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This is definitely a move not to copy - unless you have a strong stomach. As I like to paraphrase: "with great yield comes great risk".

Most readers will be familiar with PIBS (Permanent Interest-Bearing Shares), which are a kind of hybrid between preference shares and corporate bonds, particular to UK Building Societies.  Many of them offer great yields - but there have been some PIBS horror stories recently.

This one (not yet a horror story) comes from the Manchester Building Society with a great yield (over 9%) but a chilling warning...

Portfolio Buy: ETF iShares Markit iBoxx Euro High Yield Bond (LSE:IHYG)

A house of cards?
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Continuing the theme of topping up my ETF holdings, I have bought some more of this ETF, which specialises in Euro junk corporate bonds. Since I bought before, the price has gone down (at least in Sterling) and the yield has gone up - now touching 6.7%.

But remember the eternal truth: yields are high for a reason - this corner of the investment world is quite evidently risky. I may be investing in the financial equivalent of a house of cards.

My ETF 'Wild Bunch' - and Today's Purchase

Call me fanciful, but I like to think of my selection of ETFs (Exchange Traded Funds) as a bunch of yield-hungry gunslingers roaming the West (and the East, for that matter), looking for easy pickings - much like the Wild Bunch. In fact I could call my 'international' ETFs the  Magnificent Seven.

But I digress: gunslingers are usually paid by results, so how have they done? And I've just thrown some more cash in their direction - are they going to make a killing?