Entry P/E Ratio
Approximates the maximum entry P/E for a dividend-paying stock by compounding the dividend yield alongside earnings growth in the numerator, with an optional margin of safety discount.
When to use: Use for dividend-paying stocks where part of the return comes from cash distributions. Leave MOS blank for the unadjusted maximum.
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| EntryPE | Entry P/E Ratio | Maximum P/E multiple to pay today for the target return | integer |
| ExitPE | Exit P/E Ratio | Expected price-to-earnings multiple at exit | integer |
| g | Earnings Growth Rate | Expected annual EPS growth as a decimal | % |
| r | Required Return | Annual required rate of return as a decimal | % |
| DY | Dividend Yield | Annual dividend yield as a decimal | % |
| n | Holding Period | Years held before exit | years |
| MOS | Margin of Safety | Discount applied for valuation cushion as a decimal | % |
Real-Life Examples
Example 1: Dividend Aristocrat (no MOS)
A consumer staples name grows EPS at 6%, yields 3%, exits at 18× in 10 years. You require 9% and apply no margin of safety.
Given
Step-by-Step
Compounding the 3% dividend yield alongside earnings growth lifts the justified entry multiple slightly above the 18× exit P/E.
Example 2: High-Yield Utility with 25% MOS
A utility grows 3%, yields 4%, exits at 14× in 5 years. You require 8% and demand a 25% margin of safety.
Given
Step-by-Step
Even with a 4% yield credit, the required return outpaces growth-plus-yield — and a 25% MOS pulls the buy multiple down to about 10×.
Frequently Asked Questions
The formula assumes the dividend yield stays roughly constant and that distributions are reinvested at the dividend rate over the holding period. A full DDM or DCF treats dividends as discrete cash flows — more precise, but heavier to compute.
Compounding the yield separately keeps the price-appreciation discount (r) and the dividend contribution mathematically distinct. It mirrors how total return chains multiplicatively in real life: the (1+g)(1+DY)/(1+r) factor pulls the per-period growth, yield, and required return into one clean ratio.
Most for high-yield, low-growth stocks (utilities, REITs, MLPs) where dividends drive the bulk of total return. For low-yield growth stocks the adjustment is small and the standard entry P/E formula is close enough.
No — leave MOS blank (or set it to 0) for the unadjusted maximum entry P/E. Enter a decimal between 0 and 1 to discount that multiple by the chosen percentage.