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MAD Charts: What They Are And How They Work

Feb. 05, 2021 1:06 AM ETHD, JNJ, MO, MSFT, UNP, TXN3 Comments
Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Summary

• MAD Charts are one of the most popular tools we have developed.
• In this blog post I explain how they are calculated, and how we use them.
• The only way for you to access them is through the Dividend Freedom Tribe.

MAD Charts are a great way for dividend investors to compare a stock's current yield to its 10 year history.

If you're not familiar with them yet, this is a MAD Chart for Texas Instruments (TXN):

Source: Dividend Freedom Tribe

They are great for active investors who believe that the market is NOT efficient, and that therefore there are great prices at which one can buy stocks, and prices at which one should not buy stocks.

Whether you then believe there are prices at which you should sell stocks (as we do) doesn't actually matter.

Know the stock's history.

For instance, you might take a stock like Home Depot (HD).

You'd note that HD has yielded as little as 1.6% and as much as 3.94% during the past 10 years.

However for the core 50% of the time, the yield was between 2.03% and 2.39%, with a median at 2.18%.

You could therefore say that when HD yields around 2% it is becoming historically overvalued, and when it yields more than 2.4% it becomes historically undervalued, with anything in between being more or less "fair".

Investors might want to visualize this graphically, to locate the current yield relative to this history at a glance.

So we asked ourselves: If HD were to yield 1.6% (its lowest yield), what price would it have had throughout the past 10 years?

If it were to yield 3.94% what price would it have been? What about the median yield, as well as the 25th and 75th percentiles?

This gave us clear ranges which we could chart. Graphically it looks like this.

I added arrows for effect, but it clearly shows that although buying HD at any time during the past decade was mostly a good idea, there are prices which would have significantly enhanced your returns, and reduced the time it took before the stock increased.

Source: Dividend Freedom Tribe.

When is a stock a good deal. This is what we want to figure out.

For some stocks like HD, there are about as many opportunities to buy as there are to sell.

Know when to sell

Other stocks, buying opportunities are rare. For instance Johnson & Johnson (JNJ) had many opportunities at which you could have sold, few at which you could have bought.

Source: Dividend Freedom Tribe

This knowledge served us as a guide. Let's not sell all our position in one go, but in multiple instances, for an even more outlandish price might appear before a cheap one does.

This was the case with Union Pacific (UNP).

Source: Dividend Freedom Tribe

We bought in May 2020, at \$150, then sold part of the position at \$201, then the rest of it at \$215.

This chart also shows that the opposite is true. A good price might get even better before it gets expensive. Which is why we never buy all in one shot, but always in multiple instances.

Ease in, ease out. What's the rush?

These charts do have their limits.

For one they imply that a stock will trade within a certain range of dividend yields.

This might not be true for sustained periods of time.

For instance, Altria (MO) has been a bargain buy since 2018.

Source: Dividend Freedom Tribe.

On the other hand, Microsoft (MSFT) has been "overvalued" since then.

Source: Dividend Freedom Tribe.

While I do believe this to be the case, and expect a reversal in both stocks in the next 5 years, it would be foolish to think that the historical ranges are set in stone.

They can move dynamically, and this is where deeper level analysis can happen.

Clearly for MSFT, the stock has not been valued based on its dividend for the past 10 years.

The same could be said for MO.

Is this a limit of MAD Charts, or markets going crazy?

You'll decide.

This is why a company's future growth, management's willingness to increase the dividend at an attractive rate, and a plethora of other factors need to be considered.

That's why we have the Dividend Freedom Tribe.

If you're looking for a silver bullet. This isn't it. If you're looking for a tool, which will help you make better decisions as a dividend investor, the MAD Chart is a powerful weapon.

If it was enough in and of itself, you wouldn't need the Dividend Freedom Tribe. We could just send you the MAD Charts for the 1,500 or so companies which pay a dividend, and be done.

But you do need more. You need to analyze the safety and quality of the companies which pay the dividends. You need to consider their context, and the drivers of their valuations. You need to understand their prospects for dividend growth, whether the company's financial capability to deliver, or management's willingness.

That's where we come in.

The Dividend Freedom Tribe gives you MAD charts for all companies, and so much more.

You get model portfolios, retirement planning tools, buy/watch/sell lists, in depth analysis of some of the best opportunities, and a live chat full of like minded dividend investors.

But we're increasing our prices... on the 28th of February.

As we continue to reinvest into our service, its value grows. There is also a network effect. We have already risen the price from the introductory low \$369 per year to \$399 per year.

This is still 42% off, mind you, compared to the monthly plan.

However, on February 28th, the price goes up. This is your chance to get in at the current price, and lock it in, forever.

We'll give you two weeks for free to figure out if this is right for you.