Imagine, for a moment, that you're an investor who has been doing their homework in choosing the next stock in which you'll invest. You've narrowed your options down to two stocks, where you will one invest in one. One of the two stocks is a growth stock, which is to say that your returns will be totally determined by how its price changes over time. The other stock you're thinking about buying is a value stock, whose stock price could also grow, but which also will pay you dividends.

Which stock will you choose?

To answer that question, you will need to make some judgments about how each stock is valued. That can be as easy as calculating its Price-to-Earnings Ratio (P/E), but a word of warning. What you care about is the future, because that's where your returns will be. How can you factor in how much the companies behind each stock will grow in the future? And in the case of the value stock that also will pay you a dividend, how can you factor those future returns into your valuation assessment?

Quantamental Trader reviewed how legendary trader Peter Lynch did that when selecting the stocks in which he invested:

The Foundation: From P/E to PEG

Traditionally, the Price-to-Earnings (P/E) ratio has been a fundamental metric for valuing stocks. It relates the current stock price to its earnings per share (EPS). However, the P/E ratio alone often lacks context because it ignores the company’s expected growth. For example, a high P/E might be justified for a rapidly growing firm, while a low P/E might indicate undervaluation or fundamental problems.

The PEG ratio addresses this by dividing the P/E ratio by the company’s projected EPS growth rate (G):

PEG = Price-to-Earnings Ratio / EPS Growth Rate

A PEG ratio around 1 is generally considered fair value, less than 1 implies undervaluation, and above 1 overvaluation—though these are rules of thumb.

Peter Lynch recognized this metric’s usefulness but also noted its limitations.

The Innovation: Why PEGY?

The PEG ratio, while helpful, ignores dividends. Mature companies often grow earnings slowly but pay dividends consistently, returning value to shareholders. The PEG ratio tends to unfairly penalize these slower-growers because their growth rate is lower, making PEG higher even though their total return could be attractive when dividends are included.

To correct this, Lynch introduced the PEGY ratio, which incorporates dividend yield (DY) alongside expected earnings growth:

PEG = Price-to-Earnings Ratio / (EPS Growth Rate + Dividend Yield)

By summing the earnings growth rate and dividend yield, PEGY reflects the total expected return—growth plus income—and better accounts for companies at different stages: fast-growing firms with little dividend, and mature firms with steady dividends.

We've built the following tool to do the PEGY ratio math, but first, here's some data from two stocks we researched on Seeking Alpha. Both stocks are beneficiaries of the AI boom of recent years. One is a growth stock in the technology sector that pays a very small dividend, the other is a value stock in the energy sector that pays a substantial dividend. Here are their respective valuation metrics, which we sampled after the close of trading on Friday, 15 August 2025:

If you use a site like Seeking Alpha to look up this data, after searching for a specific company, you'll find the P/E Ratio (TTM) under the stock's "Valuation" section, the EPS Diluted Growth (YoY) under the "Growth" section, and the Dividend Yield (TTM) under the "Dividends" + "Dividend Yield (TTM)" section. This data is backwards-looking, which has the advantage of being relatively fixed and which can be used with the assumption that the near future will be similar to the recent past. Alternatively, you could substitute the FWD version of this data, provided you recognize expectations for the future are subject to change with little notice....

Here's the tool. If you're accessing this article on a site that republishes our RSS news feed, please click through to our site to access a working version of the tool.

The default data in the tool is for the growth stock, which finds it has a PEG of 2.45 and a PEGY of 2.35. Substituting the data for the value stock in the tool, we find it has a PEG of 1.93 and a PEGY of 1.39. Quantamental Trader provides the following guidance for how to interpret these results in comparing the two stocks:

Interpreting PEGY

• PEGY < 1: The stock may be undervalued relative to its combined growth and income potential.
• PEGY ≈ 1: The stock is fairly valued.
• PEGY > 1: The stock might be overvalued.

According to this interpretation, both stocks would be considered to be overvalued. The value stock however is closer to being fairly valued according to the PEGY measure.

That's not to say the growth stock won't provide the kind of return you might be hoping for, but it is important to recognize there is a greater risk associated with investing in it. The PEGY valuation tool gives you the means to quantify what that relative risk looks like - just plug in the numbers that matter for the stock you're evaluating.

Image credit: Microsoft Copilot Designer. Prompt: "Picture of an investor doing math to choose between a growth stock and a value stock". Just ignore the math and whatever the investor is doing with their lip and finger to balance the gravity-defying pencil as depicted.