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The ultimate challenge for any investor is to be able to skilfully combine both technical and fundamental data. This unfortunately eludes most investors and this is mostly because the data for both has hitherto not been easily available. That is why I want to talk about the combined analysis available through ‘Integrated Investor’. Let’s look at WOW as an example of how we can use integrated analysis to give us confidence in making smart decisions.
The chart below illustrates the price movements of Woolworths (WOW) on the ASX. In addition to the obvious level of price support around $26, there was nothing to suggest that the share would turn south at the $35 mark. Indeed, from a technical perspective, there is very little to suggest that WOW is in anything other than the final phases of a head and shoulders pattern. If we dig deeper, however, it could be the moment to start looking forward, not backwards.
Chart 1
click chart for more detail
If we were to introduce a chart of dividend yield we may see some extremely compelling reasons why the support line could hold and why the share turned at $35. We will use yield as a proxy for the share’s value. Just note that:
- A low price and a high dividend will result in a high yield
- A high price and a low dividend will result in a low yield.
In the same way you may consider property, all things remaining the same, high yielding shares are attractive to investors.
The following chart shows three different calculations of dividend yield, so it is important to identify how these are arrived at:
- The fluctuating blue line shows a daily calculation of dividend yield based upon the current share price and the last reported dividend.
- The horizontal red line shows the historical dividend yield calculated from the year end price and dividend.
- The horizontal blue line shows the forecast dividend yield calculated from the average share price year to date and a forecast dividend taken from Integrated Investor’s SuperValue calculator.
Chart 2
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When the two charts are integrated, it becomes instantly obvious how relevant dividend yield (and fundamentals) can become in timing an investment. Looking at the third chart there is evidence that the daily dividend yield (which you will recall is calculated from price) can act as a trigger to show where and when the value of WOW has been factored into the market.
Effectively, when the share’s dividend yield is higher than the historical dividend yield, there are many buying opportunities. When the share’s dividend yield drops below the forecast dividend yield, it is time to sell.
Chart 3
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Of course, this is dynamic. If the accepted average dividend yield forecast changes (forecasts are made by brokers and research houses) the dark blue line will either rise or fall, thus changing the target price for Woolworths. In addition, although the historical can never change, the levels of irrational exuberance / fear can always push yields below or above this level respectively. There is no certainty in the markets, and that is why you have stop losses and money management, but here is a way to be double sure your trades and the structure of the markets are fundamentally sound.
Stay Sharp,
John Jeffery
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