ValueGain Income Model

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ValueGain Income Model

The ValueGain Income Model was created due to a lack of investment criteria for income-seeking investors.

It seeks to identify strong, solid & established businesses offering high dividends.

Its overall emphasis is on the sustainability of dividends as well as financial stability of the company.

The ValueGain Income Model only targets large capitalization companies as these tend to be the well established businesses that offer strong stable dividends.

Analysis / Calculation

The following are some of the criteria used in the ValueGain Income Model analysis:

The seven relevant criteria are:

Dividend Yield

The Dividend Yield is the full year dividend divided by the stock price and then multiplied by 100 to express the result as a percentage.

Dividend Yield reflects the income that the company distributes to stockholders.

Income investors tend to look for a high dividend yield. Dividend Yield must be greater than 4% to be classified as a ValueGain Income stock.

A PASS is given to a stock with a Dividend Yield greater than 4%.

A FAIL is given to a stock with a Dividend Yield of 4% or less.

Dividend Payout Ratio

The Payout ratio is the portion of profit that is paid out to stockholders as a dividend.

A high payout ratio is typical of an income stock which will concentrate on creating shareholder returns through dividends.

A growth stock traditionally has a low dividend payout ratio as a growth stock concentrates on reinvesting profits back into the business rather than distributing the profits to shareholders through a dividend.

A PASS is given to a stock with a Dividend Payout Ratio greater than 50%.

A FAIL is given to a stock with a Dividend Payout Ratio of 50% or less.

Price/Earnings (P/E) Ratio

The Price to -Earnings Ratio (P/E) is a measure of value.

A P/E ratio is calculated by dividing the stock price by the Earnings-per-Share.

A low P/E ratio stock is often viewed as cheap or unpopular, whereas a high P/E stock is often viewed as expensive and popular.

Generally speaking, an income stock tends to have a P/E ratio less than 20.

A PASS is given to a stock with a P/E less than 20.

A FAIL is given to a stock with a P/E of 20 or more.

Total Debt to Equity

Successful companies are usually net borrowers of money. The Debt-to-Equity ratio measures how much debt the company has, compared to shareholders equity.

The Debt-to-Equity ratio is important in gauging a company's financial stability. If Debt-to-Equity is too high then the company may run into financial difficulty. If it is too low, it may indicate that the company is foregoing positive business opportunities in order to merely create more return to shareholders.

The ratio is calculated by taking Total Debt and dividing it by Shareholders Equity.

A PASS reflects a company with a Debt-to-Equity ratio less than 100%.

A FAIL rating is given if the company has a Debt-to-Equity ratio of 100% or more.

Return on Equity (ROE)

Return-on-Equity (ROE) measures the return on shareholders funds or shareholders equity.

ROE is calculated by dividing the net profit by shareholder equity and multiplying it by 100 to express the result as a percentage. The higher the ROE the better.

A PASS is given to a stock with a ROE greater than the official cash rate + 3%.

A FAIL is given to a company that has a ROE less than the cash rate + 3%.

Dividend Stability

Income investors are concerned with the sustainability of dividends.

To test for dividend stability, dividend payments must have been the same, or increased, over the last five years.

A PASS is given to a stock that has had the same or rising dividends from year to year over the last 5 years.

A FAIL is given if the company was unable to issue a dividend in a year or had decreasing dividends.

Market Capitalization

Market Capitalization measures the size of the company. It is calculated by multiplying the stock price by the number of stocks issued.

Large capitalization companies tend to be more established businesses. Large companies are more likely to be established businesses in the public eye and thus less likely to be susceptible to accounting manipulation.

Smaller capitalization companies are often seen as being greater risk as most start-up companies are in this category.  

A PASS is given to a stock with a Market Capitalization greater than $1 billion.

A FAIL is given to a stock with a Market Capitalization of $1 billion or less.

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