Friday, May 6, 2016

How to Find Undervalued Stocks

Earlier this year I published the Dividend Toolkit for readers, which along with a comprehensive investing guide, includes the spreadsheet that I developed for myself to use to calculate the fair price of stocks.
If you want to calculate the fair value of a stock using the Dividend Discount Model (which is explained in significantly more detail in the book), and you estimate that the dividend will grow by 5% per year, and you’re using 12% as your discount rate. First, you put the simple inputs into the Dividend Discount Model spreadsheet tool:

Dividend Book Input Example
And the tool instantly updates the output chart to tell you the fair value of the stock:
Dividend Book Output Example
This output chart will not only tell you the fair stock value based on those inputs, but will also tell you the fair stock value based on nearby inputs. In this example, in addition to calculating the results for 5% dividend growth and a 12% discount rate, it will automatically show what the fair value is if it turns out that the stock only grows its dividend by 4%, or if you use a discount rate of 11% instead.
There are four different tools in the spreadsheet tool, including DCFA and DDM models. All of them focus on showing what kind of margin of safety you have based on your inputs, and the static-growth models also show what kind of rate of return you can expect given certain growth outcomes.
Besides the Toolkit, there are other ways to calculate fair price as well. You can do the simplest versions with a calculator or with free online tools. You can develop your own model if you have the time and desire.

This article was written by Dividend Monk. If you enjoyed this article, please subscribe to my feed [RSS]

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