Over the past year, investors have been fleeing to the "safety" of dividend stocks. Yet overpaying for yield, can quickly turn your "safe haven" into a trap. Correct valuation is the key to dividend investing success. Unfortunately, when it comes to valuing stocks, opinions are in greater supply than answers. I want to help us get closer to answers. Here is a tool that can help us determine a tangible price for dividend stocks.
The dividend discount model, is one time tested tool for dividend valuation. It only values the worth of an asset relative to its income, so for income investing, it's about as tangible as it gets. You'll need to make a few estimates for this model to work. Calculate what your required return on investments is, and what the anticipated dividend growth rate of the stock in question will be. Then you simply divide this years expected dividends, by the required return minus the expected dividend growth rate.
Source: Motley Fool
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