The last chapter told us how to find the dividend growth rate so that we may select stocks that fit our portfolio criteria of growing their dividends approximately 8 percent per year.
This chapter will help us determine the future growth rate of a stock after dividends are accounted for. We need the growth rate of a stock in order to achieve our goal of selecting stocks that not only have an 8 percent dividend growth rate, but also have a 7 percent price growth rate as well.
We want to strive to select stocks that will double in value (price) over the next 10 years. Just a note here: Price does not always follow value in the short term; however, price does indeed follow value over the long term. Value is the worth or the profitable projects a company builds (or buys) over the years. Price, which can change every minute of every day, is in the minds of the beholders, but value is something very real and it is something that good companies build over the long term.
During the market crash of 1987, the market (Dow) fell 22 percent in one day. Actually, the price of stocks in the Dow on average fell 22 percent, but the value of those stocks did not fall except in the minds of those large money managers who felt they needed to stay liquid. Eventually, price caught back up to the intrinsic (basic) value of those companies. As a matter of fact, the market actually ...