💎 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) + dividend income. This is how actual investors make money!
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 vs PEG.
📊 How to Interpret PEGY Values
PEGY interpretation is similar to PEG, but generally even more favorable for dividend payers:
PEGY < 1.0 = Excellent Value ✅✅
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 makes it look much better!
Key Insight: 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
- 1️⃣Dividend Sustainability: PEGY assumes dividends will continue. If a company cuts its dividend, the PEGY calculation becomes misleading.
- 2️⃣Not Universal: PEGY is useless for non-dividend stocks. Use PEG instead for growth stocks.
- 3️⃣Growth Estimates: Like PEG, PEGY relies on potentially inaccurate future growth projections.
- 4️⃣Tax Considerations: PEGY doesn't account for the fact that dividends are taxed differently than capital gains.
📌 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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