When studying stocks to buy, how would you use the yield and P-E Ratio?

Answer 1

They are two important criteria to consider, despite what some of your other responders believe.

A stock that has a decent yield is less likely to be extremely volitile (drop a lot in price). I always consider yield and I also consider whether the yield is increasing or not over time. Generally speaking, a company that regularly increases its dividend is a better investment than one that does not.

pe ratio. This is a little more subjective. But again other things being equal a lower pe ratio indicates a less expensive investment. But there are certainly other considerations that have to be taken into account. I do tend to avoid stocks with pe ratios above about 17 in general. There is too more risk among those than among stocks with lower pe ratios. I believe Warren Buffett would agree on that point.

But other factors are equally important. Sales growth, amount of debt a company carries, company size, earnings growth and consistancy, capital requirements, management compensation.

Answer 2

Yield is added to the growth, especially if you use a DRIP. A Stock that grew 8% YTD with a 2% yield actually grew 10%.

You can only get a PE if the company is making a positive EPS. It comes out to a company with a PE of 20 is growing 5% and a company with a PE of 5 is growing 20%.

Answer 3

I check the yield of the dividends when I buy companies (to diversify away from all bonds) for current income. Too low a yield, not enough for me to live on, too high a yield, the company may be too risky for my taste. The range will be different for everyone. For long term holdings, forget yield, check to see how many consecutive years the dividend has been increased. Over 20 years means to me the company is making money through good times and bad. (An example only, not a recommendation: Proctor & Gamble has increased their dividend for the past 50 years. It shows me that they are likely to be around longer than I will be. For P/E ratio, I check it against historical norms for the market, for other companies in its sector, and against current competition. Much higher than others, maybe overvalued or maybe they just have a much better product/business. Much lower than others, they may not have been "discovered" by the masses yet or they maybe in trouble. It is just one factor to consider in relation to many factors.

Answer 4

I wouldn't and don't.

A stock can be evaluated by three simple criteria.

1) Positive sales growth. Increasing sales is a very good thing and indicative that their product is desirable.

2) Positive Net Income (NI) Growth. Net Income should be moving with sales. If it isn't, something is wrong. Note, there are many legitimate reasons for this NI to go down with positive sales growth. More on this below. Basically, you want positive NI with positive Sales.

3) FCF. Free Cash Flows. Cash is king and you want the comapny to show positive cash flows. It is possible for a firm to have positive growth and positive NI and lose cash (credit most likely). So just because number 1 and number 2 are met doesn't mean the company is healthy...if all sales are credit and no one actually pays...uh oh (yes, it has happened).

The Note I referred to above. Positive sales growth and a negative NI can be the result of inventory purchases, capital allocation (say they build a new factory for more production) and others. You will find this information in annual and quarterly reports. Makes sure that whatever they are doing makes sense, not only for them and their industry but also in terms of the larger economic picture.

Everything else is bunk.

Answer 5

I'm not a pro by any means, but the yield is the money you get after every year, if that company pays earnings....usually it is a percent, meaning that if that company makes money, they pay 0.X% earnings to their stockholders.

In our case, it has been a couple of bucks, but our investment is likely to split, meaning that the shares double, the price goes down. The value will go up again and that is where we are going to earn the money.

I'm not sure what P-E ratio is, maybe price to earnings, but my husband does the employee buying of their stock so I haven't heard what that means. Maybe look it up on Wiki about what that means....