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.