I'm a fan of dividends. I trust them more than earnings
which I feel can be more easily manipulated. So what's the problem? Well, the
problem with using dividend yields as a valuation method is that different
countries/industries/sectors have different cultures and taxation regimes when
it comes to paying out dividends and the importance those investors place on
dividend yields.
In general dividend payouts as a percentage of earnings are
much higher in the UK and Europe compared to the USA and most of Asia.
A bird in the hand...
As the saying goes "A bird in the hand is worth two in
the bush" and when it comes to retained earnings I'm generally of the same
opinion. The existence and credibility of retained earnings and their value to
investors as increased future earnings is suspect. I agree they should carry
some weight however. If we discount retained earnings by 50% we can get an
adjusted yield of:
Where: Earnings Yield = 1 / P/E Ratio
The following chart gives the estimated Adjusted Yields of
iShares funds. The green being the actual dividend yield and the blue being the discounted retained earnings. (P/E ratio used in the calculations is an average of data
available from etfdb.com, us.ishares.com and yahoo finance; September 2012)
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