Investment Portfolio Analysis
“Dividend yield” is defined by Fernando (2022) as “the ratio of a stock’s yearly dividend divided by its share price.” The yield on cost or the yield on current market value are two ways to represent yield.
Dividends stated as a proportion of the price paid for a stock are referred to as yield on cost. It divides the current dividend per share by the purchase price of a company. This tells the investor what their current rate of return on their initial investment is. This can be useful for estimating current returns on initial financial outlays. However, there are a number of flaws in yield on cost. It disregards the period since purchase, inflation rates since purchase, and other expenditures incurred since purchase.
Investors implement quantitative analysis of investment portfolios by utilizing data from financial instruments such as common stocks to objectively analyze the performance of each investment as well as the overall portfolio. The distinctions between yield on cost and yield on current market value will be examined in this paper, as well as how they are applied. The investment portfolio analysis will be computed. A conclusion will be reached, as well as non-quantitative remarks regarding the portfolio.
Quantitative Analysis of Portfolio
The weighted average yield will be calculated by calculating the current market value, projected current yield, weighted average factor, and weighted average yield for each portfolio position, as well as the total current market value for all portfolio allocations (Bragg, 2022).
The current market value of each security position of the portfolio
The first step is to figure out what the current market value is. The current market value of a portfolio position’s equity is equal to the total value of all stocks owned in this position. This is computed by multiplying the current market price of a stock by the total number of shares held in that stock (Bragg, 2022).
According to Bragg (2022), formula for the current market value calculation is as follows:
Current market value = number of shares multiplied by current market price
To calculate CMV, take the latest market price at which the stock trades at the end of regular market hours on a particular day (Kenton, 2022) and multiply it by the position, also known as the number of shares.
Individual Yields (Estimated Current Yield) Based on Current Market Pricing
The yield on cost (YOC) is the dividend based on the initial cost of a stock. Because YOC may rise over time for companies that “frequently boost their dividend,” it is a beneficial tool for long-term investors (Fernando, 2022). However, it should be utilized with care when compared to a stock’s CMV because CMV is normally for one year while YOC is for several years (Fernando, 2022). CMV is used to determine the current value of a stock portfolio and to forecast its resale value.
To find the estimated current yield we can use the below formula:
Estimated current yield = Estimated Dividend / Current Market Value
The Weighted Average Factor
The weighted average factor is the weighted average of the individual proportions of each investment in a portfolio (Bhardwaj, 2019). The portfolio may be examined by computing the weighted factor for each stock and comparing it to the overall portfolio investment. For example, we may ensure that no one investment is disproportionally large or little and make any necessary modifications to match the investment plan. To find the estimated current yield we can use the below formula:
The Weighted Average Factor = Current Market Value of each stock / Total Portfolio Market Value
To confirm our calculation we can sum all the weighted factor and the total should be equal to 1.
The Weighted Average Yields
Frankel (2022) defines weighted average yield as “understanding how the larger market changes.” When looking at a portfolio, it reveals how the portfolio as a whole performs and allows each company’s earning potential to be compared to the expectations established by the overall portfolio average yield in order to build an investment plan (Frankel, 2022). To find the weighted yield, we can use the below formula:
Weighted average yield = Estimated current yield for each stock* weighed average factor
Therefore, the calculation will look like this:
Non-quantitative Observations (conclusion) Including Recommendation about the Portfolio
When considering qualitative elements, we consider “behavior and the reasons for it”, which cannot be quantified economically. A review of competitors, market position within the industry, and internal stakeholders (Huber, 2013), as well as “the quality of management, corporate governance practices, ethics, reputation in the market, brand value, consistency of business strategies” (Huber, 2013), may show that these low performers have value to the portfolio.
Dividend yield rises when the stock price falls and falls when the stock price rises. Some stock sectors offer a higher-than-average dividend, but they are frequently not growth stocks, and stock value growth may be crucial for investor profit. Some emerging companies may pay a smaller average dividend than established companies in the same industry, but they are reinvesting in the company and increasing shareholder ownership. This can have a beneficial impact on the value of the company’s shares and benefit the investor in the long run (Fernando, 2022).
For every $1 invested in our portfolio, we earn 3.18 cents. This would be compared to the investment plan, and relevant adjustments would be implemented. To investigate further, The median value for the estimated current yield (2.898%) and the weighted average yield (0.291%) were used to identify underperforming and outperforming stocks. McDonald’s now has the lowest yield at 1.58%, but it also has the highest CMV and, as predicted, the highest weighted average yield of 0.33%. Chevron has a higher than median current yield of 3.39% and a lower than median portfolio weighted average yield of 0.21%. From a purely mathematical standpoint, it makes sense to sell MCD and reinvest in CVX.
Pepsi Cola is the worst performance in portfolio yield contribution at 0.08% and the second-worst performer in current yield at 1.58%. Coca-Cola, Johnson & Johnson, and Proctor & Gamble are all dismal achievers, falling below both medians. From a quantitative standpoint, the following companies should be considered for reinvestment in the top performers: AT&T, Philip Morris International, Altria, and Duke Energy.
Our low performers have a solid position within their respective industry as well as great brand awareness. Given this insight, any adjustments to the portfolio position should be examined, but they should not be eliminated.
It is crucial to remember that a 3.18% yield in the stock market does not appear promising since it demonstrates that the stock market is a high-risk investment. However, I would propose that stock performance be tracked over time, as well as the organization’s stability, and that other investments be investigated.
References
Bhardwaj, S. (2019, September 9). How to calculate weighted average returns using MS Excel.
The Economic Times. Retrieved December 6, 2022, from
Bragg, S. (2022, April 30). How to calculate the market value of equity — AccountingTools. AccountingTools. Retrieved December 6, 2022, from https://www.accountingtools.com/articles/how-to-calculate-the-market-value-of-equity.html
Frankel, M. (2022, August 1). Weighted average cost of capital formula. The Motley Fool. Retrieved December 6, 2022, from https://www.fool.com/investing/how-to-invest/stocks/weighted-average-cost-of-capital/
Fernando, J. (2022, August 30). Dividend yield: Meaning, formula, example, and pros and cons. Investopedia. Retrieved December 6, 2022, from https://www.investopedia.com/terms/d/dividendyield.asp
Huber, J. (2013, February 17). Quantitative vs. qualitative methods for stock analysis. Seeking Alpha. Retrieved December 6,2022, from https://seekingalpha.com/article/1192151-quantitative-vs-qualitative-methods-for-stock-analysis
Kenton, W. (2022, May 19). Current market value (CMV). Investopedia. Retrieved December 6, 2022, from https://www.investopedia.com/terms/c/cmv.asp
Note:
This article is written based on University of The People Financial Management (BUS 5111) written assignment by Fristy Tania in November 2022
