So far we’ve looked at two of the five factors I think are important in choosing a stock. Hopefully you agree that the system seems quite simple and requires very little time. Remember, the name of this blog is Passive Dividend Income. I don’t want to spend too much time or effort on this and I certainly don’t want to have to think about my portfolio all the time. I invest a little time in choosing a stock and then pretty much forget about it until it’s time to buy again, letting that small investment pay dividends in the future. Ok, I couldn’t resist that pun. In the last entry we talked about buying a stock that’s on sale. Now let’s talk about making sure there won’t be a better sale on that stock in the future.
Back to our analogy. I’ve picked the supplier I want to buy from, I’ve found the item I want and now I’m checking to see if it’s on sale. I’m in luck! It is. The trouble is, how do I know this is the best price I can get? In other words, what if I buy it now and then it goes on sale the following week at a deeper discount? Oh, the horror! Last time we learned we can determine if the stock is on sale by comparing the current price to the 52 week high. As with the camping gear, how do I know this is the lowest the price will go? I don’t. But what I can know is how the current price compares to the lowest price people have paid in the last year (known as the 52 week low).
Time for another calculation. For each company on the S&P 100 I figure out how far above the 52 week low it is. This gives me an idea of whether the sale price is the best price for this stock or if it’s likely to go lower in the future. In the example at the left, we see the stock is 0.8% above the 52 week low. This is exceptionally close to its 52 week low which means that, while it’s still on sale, the price could go lower still. In other words, if the stock were trading at, say, 10% higher than the 52 week low, it suggests that the price is recovering. To be sure, we could simply look at the price history for the last few weeks. Lots of websites provide that kind of information but the charts at www.google.com/finance are especially easy to use.
A stock that is far from the 52 week low is not at the best sale price anymore. Remember, share prices fluctuate between the 52 week high and 52 week low. Our goal is to try and buy when they are far below the high but not yet far above the low. Incidentally, being a little above the 52 week low also suggests the price is recovering and less likely to go lower after I buy it. I’m a little wary of stocks that are at their 52 week low for that very reason.
Of course, lots of things affect share prices but these are big, blue chip companies with high daily trading volumes that are being bought and sold by lots of institutional investors so the prices don’t move very much day-to-day. Lots of people are doing in depth analyses of company valuations which means we don’t have to – thankfully! We can let the price history be our guide to what people are willing to pay now and what they might pay in the future. While our long-term focus is dividend income, we’d like to see growth in the value of the stock too!
