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Unformatted text preview: three had expected growth rates greater than 3%.
Looking at the process, you would have been better served if you had not begun the
process by looking at the highest dividend yield paying stocks and instead looked for
stocks that met multiple criteria – high dividends, sustainable earnings and reasonable
growth rates in earnings per share – across all traded stocks. For instance, you could screen
all US stocks for those stocks that have the following characteristics:
• Dividend yields that exceed the treasury bond rate: The treasury bond rate offers a
useful measure for comparison since it represents what you would earn on a riskless
investment. If you can buy stocks that deliver dividend yields that exceed this rate,
and you can keep earnings these dividends forever, you would not even need price
appreciation on the stock to break even on the investments.
• Dividend payout ratios that are less than a cutoff: Earlier in the chapter, fairly
arbitrary cutoffs ranging from 67 to 80% were considered. The idea behind this
constraint is to eliminate...
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This note was uploaded on 01/17/2012 for the course ECON 101 taught by Professor Econnorm during the Spring '11 term at Art Institutes Intl. Minnesota.
- Spring '11