Another article from, my writing on HumbleDollar.com
My Biggest Gamble
Richard Quinn | Feb 13, 2024
I’M NOT A SAVVY investor, nor do I pretend to be. Some people get paid to analyze and make predictions about stocks, often for people like me. How reliable are their opinions? I’m not so sure.
Take the newsfeed about my largest single stock holding, the utility Public Service Enterprise Group (symbol: PEG), that I got late last month from my Fidelity Investments account:
“Guggenheim Downgrades Public Service Enterprise Group to Neutral From Buy, Adjusts Price Target to $61 From $64. MT Newswires · 11:21 a.m.”
“The Analyst Landscape: 7 Takes On Public Service Enterprise. Benzinga · 11:00 a.m. The 12-month price targets, analyzed by analysts, offer insights with an average target of $63.71, a high estimate of $70.00, and a low estimate of $61.00. This upward trend is apparent, with the current average reflecting a 1.4% increase from the previous average price target of $62.83.”
What to do? Do I bet on the $70 analyst or the $61 analyst? That’s quite a range. What do these experts know that I don’t? More important, what does the $70 guy know that the $61 guy doesn’t—or vice versa?
This wide range of views on the same stock at the same time presents a good case for index funds, especially for us befuddled folk. I’ve been acquiring Public Service Enterprise shares for more than 50 years by way of a stock purchase plan, individual purchases, employee compensation and dividend reinvesting.
I still reinvest my dividends today. Someday, after I’m gone, the dividends might supplement my wife’s survivor income. In the meantime, what actions am I going to take as a result of the analysts’ predictions? None, except continuing to reinvest my dividends in additional shares.
Now, about those dividends: It’s $2.28 per share, so the stock’s recent yield is close to 4%. Is that my yield? I say no. My yield is the current dividend as a percentage of the price I paid for my shares.
For shares that cost me $45, my dividend yield is about 5%. That will never change for those shares unless the dividend amount changes. It seems like simple math to me. But since math is not my strong point, some friends almost had me convinced I was wrong.
They said the yield is always the current yield on the current price. Yeah, if you purchased shares at today’s price. Please tell me they’re wrong.
To be honest, I see the stock market as the world’s largest casino, where logic is in short supply. Why do share prices go up? Because the value of the company is expected to increase based on growing earnings, I’m told. I’m not sure how that’s so different from expecting to hit three cherries in a row on a slot machine.
Now, if those growing earnings are shared with investors, that rising share value makes sense. What if there are no dividends or dividends aren’t increased? The word then is the company is “reinvesting in the business” so its future earnings will increase. That compels investors to bet that other investors will pay even more for the shares later because of the stock’s higher earnings.
No matter. It seems to work—for some people. But is it better than placing a bet on a roulette wheel? I wonder.
Read more by Richard Quinn
QUINNSCOMMENTARY 
Two points, Richard.
1. The yield is better thought of as based on the current price because you can sell your stock for that amount of money now. Consider a stock you bought for $1 and it now is worth $10, with a divided of 5 cents. You could sell that stock and reinvest the funds in a stock that pays 3 percent or 30 cents. The original 5% (5 cents) does not look very good any more.
2. It has been shown many times that index funds are better for the average investor than picking individual stocks. Fewer than half of the professionals who run mutual funds beat the index averages
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I am missing something. How is 3% better than 5%? Some of the stock mentioned I have had over 50 years, some acquired in the $30 range, but reinvesting I have no idea what I purchased at, but I do know my yield on the accumulated shares is well above the current yield.
I agree about index funds where most of my investments are. The stock is about 8% of total.
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Sorry, ,Richard, I guess I wasn’t clear. It is not that 3% is better than 5%. It is that 3% of $10 is better than 5% of $1. You can get a 30 cent dividend(3% of $10), rather than a 5 cent dividend (5% of $1). That is the flaw in thinking about yield as a percent of cost, rather than a percentage of current value. The true percent of a 5 cent dividend when a stock sells for $10 is only 0.5%.
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If someone asked me the yield on a stock I own, I would always reply using current price and dividend, but it’s still not MY yield.
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It is interesting to consider the current dividend compared to the purchase price. For stocks held a long time, you will get a warm and fuzzy feeling about the investment. But if you are an active investor, the current yield is used to compare a given stock to other possible uses for the money.
If you have a choice between two stocks that are in the same industry and financially sound, the one that currently gives a 3% yield is more attractive than the one that gives a 1.5% yield. That said, current yield is just one factor to consider when evaluating an investment.
Most of my holdings are in mutual funds and ETFs. I used to dabble in individual stocks and did ok. But I got tired of trying to figure out what the crystal ball said and now I mostly leave it to the professionals.
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Good points
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Talk about RISK!!! The INDEX should be renamed; The Magnificent 7 Index–those 7 companies gained 111% in ’23–they now make up in the range of 29% of the INDEX an all time high–the 493 stocks of the S&P 500 showed modest gains, while adding the Magnificent really changes the equation—an equally weighted index might be prudent.
Can you say: “Nifty Fifty”?
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People with crystal balls eventually end up with crushed glass.
A 3% yield vs. a 1.5% yield should not necessarily encourage someone to buy the higher yield. For folks with a horizon of 10-years or so you might consider a growing dividend. I always wanted my dividend to grow so current yield would be secondary to prospects of future growth of dividend. And, yes this is just one factor to consider.
Who among us would not have wanted to buy Berkshire Hathaway (sp?)20-years ago–what’s the dividend paid by Buffett?
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I never thought of the yield from the original purchase price only from the current share price, very interesting and “ eye opening “!
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Look at your dividend the way you would your capital gain–what’s your cost and what price is it now–I bet you always look at an investment based on cost and the price you can sell it for–consider the amount you paid for Coca-Cola 30-years ago and the current dividend–that gives you a yield on your purchase price–if you sold, as an example, all the shares, then you know your profit, or capital gain.
If 5-years ago you bought a 60-month CD yielding 4%–and 12-months ago the same 60-month CD has a 5% yield–your yield is 5% based on your purchase price and when you bought it. Sell it or it matures, and you buy another, then your yield is based on what they are paying on the date you buy it.
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