Chapter 5. Value and Blue Chip Stocks

Nowadays people know the price of everything and the value of nothing.

Oscar Wilde

Recognizing quality is an essential component of the dividend value strategy, but quality and value are entirely different measurements. The Select Blue Chips listed within the pages of Investment Quality Trends are all high-quality companies, but not all of them represent current good value. That is, even the highest-quality stock can be overpriced. Accordingly, once investors have established the qualitative bona fides for a blue chip stock, the measures of good value should be applied to maximize both the safety of capital and the potential for real total return.

Finding Good Value

If I had to choose just one factor as the key to investment success, it would be the ability to recognize and appreciate good value, which leads to two important questions: How is value measured in the stock market, and how does an investor know when the price of a stock represents good value?

There are three fundamental tools that investors use to establish value in the stock market: dividend yield, price-earnings ratio (P/E), and price-book value ratio (P/B), as shown in Figure 5.1.

Three Funfsmental Investor Tools

Figure 5.1. Three Funfsmental Investor Tools

Of the three measures, the primary measure of value in the stock market is the receipt of dividends, which is expressed as dividend yield. Dividend yield cuts to ...

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