Final Remarks – Dividend Investing – Mark Lin (2011)

For background, please feel free to peruse the earlier posts on the book.

After all that, it boils down to mathematics, which made it rather interesting. Now Lin utilises the Perpetuity Dividend Discount Model to arrive at his Reference price (which helps decide whether or not to buy the stock/unit/share).

Perhaps as a recap (including for myself) the equation is:

Dividend ÷ (cost of equity – perpetual growth rate)

where the Gross Domestic Product (GDP) growth rate can act as a substitute for the perpetual growth rate. So basic mathematics informs us that as the denominator (cost of equity – perpetual growth rate) rises, the reference price declines. There you have an inverse relationship with the numerator (Dividend). If one distrusts the reported (GDP) growth rates or wishes to be more conservative (thereby ensuring a greater margin of safety), one might do reduce the reported growth rates? This then increases the denominator. Is this a sound usage of the formula? Hmmm…very interesting indeed.

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