This article covers financial ratios and metrics which are relevant for a dividend investor. They are split into two categories, fundamental ratios and stock price ratios.
Earnings-per-share is total earnings dividend by total share count. It shows the amount of profit over the last 12 months that was generated for each share.
This is the total market value of a company’s outstanding shares.
Dividend yield is a company’s dividend payments per share dividend by its share price. It is one of the most used metrics in dividend investing.
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, typical values are between 20% and 80%, depending on the sector/industry.
Read more on What is a good Payout Ratio?
Arithmetic Growth Rate
The arithmetic growth rate is the simple average of returns. As an example, let’s assume a stock has the following returns over 3 years:
- Up 10%
- Down 15%
- Up 20%
Under these assumptions the arithmetic average growth rate is 5% per year. You might think you came out at break-even using the arithmetic growth rate, but that is not the case…
In reality your portfolio would be up 12.2% and not 15% (3×5%).
Geometric Growth Rate
The geometric growth rate is also called the compound growth rate or the time series growth rate.
Compound Annual Growth Rate – CAGR
The total return including dividends is important when comparing the performance of dividend stocks. Investors can compare the performance even better by using the CAGR. The CAGR can be used to evaluate how well one stock performed against other stocks in a peer group or against a market index, in addition, also different time periods (3, 5,10 years) are easy to compare.
The Dividend score is based on our Dividend Score (SDS) system, which is designed to help dividend investors, to identify strong companies with a sustainable dividend and avoid companies that could be riskier to invest in. The Dividend Score System takes into account several fundamental and price-performance metrics that affect a company’s ability to continue paying dividends and its overall return.
Some of the criteria analyze are:
- Business model and growth perspective
- Dividend history and dividend growth
- Dividend Yield
- Payout ratios
- Cash flow
- Debt ratio
- Price/earnings and enterprise value/EBITDA ratios
- Recession performance
- Geometric annual performance and loss ratio
The SDS scores range from 0 to 100. Of course, there are no guarantees when it comes to investing, but if a dividend stock scores over 60, it is an indication that the quality and the sustainability of the dividend are probably okay.
Members can use the Dividend Aristocrats Dividend Score Screener
Dividend coverage ratio (DCR)
The dividend coverage ratio is calculated by dividing the annual earnings per share (EPS) by its annual Dividend per share (DPS). So, what is a good dividend coverage ratio?
When the dividend coverage ratio is above one, the earnings generated by the company are enough to pay the shareholders their dividends. A DCR above two is considered health and a DCR below 1.5 may be a cause for concern. An important aspect to take into account when using the DCR is the fact that this ratio is not forward-looking. A historical solid DCR is not an indicator for future dividend risks.
Altman Z Score
Dividend stocks “safety” can also be measured based on above-average market capitalizations and liquidity, balance-sheet strength (per their Altman Z-score).
The Altman Z Score Formula in short:
- Altman Z score of greater than 2.99 means that the entity being measured is safe from bankruptcy (“Safe-Zone”).
- A score below 1.81 means that a business is at considerable risk of going into bankruptcy (“Bankruptcy-Zone or Distress-Zone”),
- while scores in between should be considered a red flag for possible problems. (“Grey-Zone”).