What is the PEGY Ratio?
The PEGY (Price/Earnings-to-Growth plus Yield) ratio is an enhanced version of the PEG ratio that adds dividend yield into the equation. It provides a more complete picture of value for dividend-paying stocks.
While PEG only considers growth, PEGY recognizes that dividends are a crucial component of total shareholder returns. This makes PEGY especially valuable for evaluating mature, dividend-paying companies.
The PEGY Formula
PEGY = P/E Ratio ÷ (Growth Rate + Dividend Yield)
Example Calculation:
- P/E Ratio: 20
- Earnings Growth Rate: 15% per year
- Dividend Yield: 3%
- Combined Rate: 15% + 3% = 18%
- PEGY Ratio: 20 ÷ 18 = 1.11
Note: Express dividend yield as a whole number (e.g., 3% = 3, not 0.03) to match the growth rate format.
Why PEGY is Better Than PEG
Total Return Focus
PEGY captures total shareholder returns: capital gains (growth) plus dividend income. This reflects actual investor returns.
Fairer Valuation
Companies with strong dividends may appear expensive on PEG alone, but PEGY reveals their true value by including that reliable income stream.
Better for Mature Companies
Mature companies with lower growth but high dividends (like utilities, REITs, blue chips) look much more attractive on PEGY versus PEG.
How to Interpret PEGY Values
PEGY interpretation is similar to PEG, but generally more favorable for dividend-paying stocks:
PEGY < 1.0 — Potentially Undervalued
The stock is likely undervalued when considering both growth and dividends. You're getting strong returns for the price.
PEGY = 1.0 - 1.5 — Fair Value
The stock is fairly valued. The P/E is reasonable given the total returns (growth + yield).
PEGY > 2.0 — Potentially Overvalued
The stock may be overvalued even when including dividends. You're paying a premium that may not be justified.
PEG vs PEGY: Real Example
Let's compare two companies using both metrics:
Company A (Growth Stock)
- P/E Ratio: 35
- Growth Rate: 30%
- Dividend Yield: 0%
- PEG: 35 ÷ 30 = 1.17
- PEGY: 35 ÷ 30 = 1.17
No dividend, so PEG = PEGY
Company B (Dividend Stock)
- P/E Ratio: 18
- Growth Rate: 8%
- Dividend Yield: 4%
- PEG: 18 ÷ 8 = 2.25
- PEGY: 18 ÷ 12 = 1.50
Dividend improves valuation significantly
Analysis: Company B looks overvalued on PEG (2.25) but fairly valued on PEGY (1.50) once you factor in the 4% dividend. Without PEGY, you might miss this solid dividend stock.
When to Use PEGY
Best For
- • Dividend-paying stocks
- • Mature, stable companies
- • REITs and utilities
- • Blue-chip stocks
- • Income-focused portfolios
- • Consumer staples
Less Useful For
- • Non-dividend paying stocks
- • High-growth tech companies
- • Startups and early-stage firms
- • Companies with no earnings
- • Pure growth plays
(Use regular PEG instead)
PEGY Limitations
- Dividend Sustainability: PEGY assumes dividends will continue. If a company cuts its dividend, the PEGY calculation becomes misleading.
- Not Universal: PEGY is useless for non-dividend stocks. Use PEG instead for growth stocks.
- Growth Estimates: Like PEG, PEGY relies on potentially inaccurate future growth projections.
- Tax Considerations: PEGY doesn't account for the fact that dividends are taxed differently than capital gains.
Complementary Valuation Metrics
PEGY is excellent for dividend stocks, but combine it with these ratios for complete analysis:
P/S (Price-to-Sales)
For REITs or volatile earnings companies
P/B (Price-to-Book)
Essential for financial stocks and REITs
ROE (Return on Equity)
High ROE (15%+) indicates sustainable dividends
Profit Margin
Higher margins provide dividend cushion
Beta
Low beta indicates lower volatility
Payout Ratio
Under 60% ensures dividend sustainability
Note: For dividend stocks, prioritize PEGY + ROE + Payout Ratio. If all three look favorable, you likely have a solid income investment.
Quick Reference Guide
| Stock Type | Use PEG or PEGY? | Target Value |
|---|---|---|
| High-Growth Tech | PEG | < 1.0 |
| Dividend Aristocrat | PEGY | < 1.0 |
| REIT | PEGY | < 1.5 |
| Blue Chip (low growth) | PEGY | < 1.5 |
| No Dividend | PEG only | < 1.0 |
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