A watch list…every investor has one and each investor has some method of determining a buy price. But do you ever increase the buy price? For myself I used to adjust occasionally but with no real consistency. Worst yet, if a stock’s share price had a significant run up in share price I was even more reluctant to change my buy price thinking it was over-valued.
Last November I had a discussion on this topic with fellow blogger Divs4Jesus in my comments section about AbbVie (ABBV) which experienced a run up into the low $100 range. Up to this point I was used to buying shares of ABBV in the $65 to $80 so when it shot up to just above $100 I stopped buying shares. Our discussion for the most part concluded that even in the low $100s with its current dividend yield and dividend growth it was still a good buy. However, at the time I had this price bias for any stock that had a significant run-up making me hesitant to add more shares.
In January of this year, I resolved to address this and decided to take a different approach. The beautiful thing about dividend growth is that companies are so consistent you can confidently set your calendar knowing when they will announce a dividend increase. It was this piece of knowledge I decided to use to my advantage and create a system that increases my buy price for a position.
The approach I now use is I set a minimum dividend yield I expect for a stock and that sets my initial buy price. Then 2 months before a company announces a dividend increase, I estimate what I think the dividend raise will be and calculate the new share price based on a higher dividend payout and then readjust it when the actual dividend raise is announced.
I very briefly explained this approach to fellow blogger Life with Dividends justifying why I bought Lockheed Martin (LMT) throughout July & August and thought it would be good to share other companies where I see my buy prices changing and to start it off here is my take on Pinnacle West Capital Corporation (PNW).
PNW is an electric utility company operating in Arizona and has been growing their dividend for 10 straight years. They have a 10-year average dividend growth rate of 4.54% with its most recent raise of 6.08% and their next dividend increase is set to be announced this October.
|DGR 1YR||DGR 3YR||DGR 5YR||DGR 10YR|
For a utility a utility stock to make it into my portfolio they need a minimum dividend yield of 4.2%. With the current annual dividend of $3.32 per share that sets my current buy price at $79/share.
Currently I am projecting PNW to increase their dividend 3.2% to 5%, being this is an estimate I will use my low end projection. A 3.2% raise will increase their annual dividend to $3.43 and if you divided that by my expected dividend yield of 4.2% then my new buy price is $81.66/share. Based on Friday’s close of $77.31/share that represents a 5.33% discount to my new buy price.
There you have it, not the most complicated approach but it works for me. For transparency, I will continue to regularly post companies where I adjust my pricing upwards and hopefully you find the posts helpful.