Peter Lynch And High-Dividend Stocks

During the 13 years he headed Fidelity’s Magellan fund, Peter Lynch became known for his ability to hone in on rapidly growing companies whose stocks were ready to pop. But while Lynch did indeed love his “fast-growers”, he didn’t disregard companies growing much more slowly. Lynch had room for them in his portfolio, too. For slow-growers, Lynch wanted a high dividend yield, and the model I base on his approach requires dividend yield to be higher than the S&P 500 average and greater than 3 percent.

Lynch famously developed the PE-to-growth ratio as a way to value stocks, dividing a stock’s P/E ratio by its long-term growth rate. His idea was that when a company was producing strong growth, you should be willing to pay a higher multiple for its earnings. For slow-growing stocks, he tweaked the ratio a bit. Since slow-growers often were large firms that paid out nice dividends, he adjusted the “G” portion of the PEG ratio to include dividend yield. For example, consider a stock that has a P/E ratio of 10, EPS growth of 8 percent, and a 4 percent dividend. To find the PEG, you’d divide the P/E (10) by the total of the growth rate and yield (8+4=12). That gives you 10/12 = 0.83 To Lynch, anything under 1.0 indicated that the stock was indeed a good value.

Source: The Guru Investor

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