Dividend Ratios

The Keys to Dividend Ratios

  • There are several metrics and ratios suited for use specifically for dividend investors.

  • Dividend growth investing has historically outperformed the overall market - with lower stock price standard deviation and lower volatility. 

  • Dividend growth investing also provides rising dividend income over time, increasing the compounding of returns happen more quickly.

Dividend History

 

Companies that have a strong track record of paying out increasing dividends simply outperform other stocks, that either doesn’t pay a dividend or don’t have the history of increasing dividends. Dividend history is simply the amount of time a business has paid dividends. Dividend history matters that why I make it one of the first things I look for when selecting an investment.

Businesses with 25+ years of rising dividends are less likely to cut their dividend payments.

There are several interesting groups of stocks by dividend history.

  • The Dividend Kings List is comprised of about 30 businesses with 50+ years of consecutive dividend increases.

  • The Dividend Aristocrats List is comprised of about 60  businesses with 25+ years of consecutive increases and are part of the S&P 500.

  • The Dividend Champion list U.S. stocks that have grown dividends for the last 25+ consecutive years, regardless of size. This is a list of about 135+ stocks.

  • The Dividend Contenders List U.S. stocks that have grown dividends for the last 10-24 consecutive years. This list has around 240 stocks on it.

 

Dividend Yield

Dividend yield is a company’s dividend payments per share divided by its share price. It is one of the most used metrics in dividend investing. All other things being equal, the higher the better. You can see an extensive list of high dividend stocks here.

Dividend Payout Ratio

The Dividend payout ratio is a company’s dividends divided by earnings.

 

The higher the payout ratio is the larger the percentage of earnings being used to fund the dividend. By definition a payout ratio above 100% is unsustainable.

Dividend Payback Period

The dividend payback period calculates the number of years it will take a dividend growth stock to ‘pay back’ the initial purchase price.

 

The dividend payback period can be calculated with:

  • Stock price

  • Expected growth rate

  • Annual dividend payment

The lower the dividend payback period, the better.

 

Dividend Discount Model

 

The formula for the dividend discount model is shown below:

 

 

 

The dividend discount model is used to quickly estimate the ‘fair value’ of a dividend growth stock. An example is below.

The difficulty in applying it practically is coming up with a ‘fair’ discount rate and an accurate future growth rate.

The dividend discount model can be useful tool for coming up with a ‘ballpark estimate’ of fair value for dividend growth stocks that have strong competitive advantages.

Dividend Discount Model .jpg