10 Metrics Dividend Investors Need to Know презентация

There are hundreds of possible metrics you can use to evaluate a stock. But, some are more important than others. For dividend stocks, here are 10 of the most important metrics you can use to make informed investment decisions.

1. Payout ratio A stock’s payout ratio is a measurement of its dividend payment as a percentage of its earnings. A relatively low payout ratio indicates that the company has lots of room to increase its dividend in the future. It also shows a stock’s ability to continue its dividend payments if times get tough.

As a general rule, I like to see payout ratios that are below 60%, but there are some exceptions. For example, real estate investment trusts (REITs) are required to pay out at least 90% of their income, so a high payout ratio isn’t a sign of trouble in this case.

2. Dividend yield Surprisingly, dividend yield is possibly the least important metric on this list. Just because a stock’s dividend yield is high doesn’t make it a good investment. However, if all of a stock’s other metrics look good, a higher dividend yield can be an advantage.

It’s also worth noting that, because dividend yield depends on the current share price, yields can rise significantly when the market drops. So, in corrections and market crashes, it may be a good time to lock in higher yields on your favorite dividend stocks.

3. Dividend history and growth One of the most important factors when choosing a dividend stock for the long term is consistency. Does the stock pay a dividend every year without fail? Does the stock have a strong history of increasing its dividend?

Two examples Let’s look at two of my favorite dividend stocks to illustrate the metrics we’ve discussed so far – Wal-Mart (WMT) and Johnson & Johnson (JNJ).

Two examples Wal-Mart has a dividend yield of 3.33%, and a strong 41% payout ratio. The company has increased its dividend for 40 years in a row. Johnson & Johnson pays a slightly lower 3.05% yield and has a 57% payout ratio – and has increased its dividend for 52 consecutive years. In other words, the last time Johnson & Johnson shareholders didn’t get a dividend increase was in the early 1960s!

4. Interest coverage Also known as “debt coverage,” this metric tells us how easy it is for a company to pay its debts. For example, an interest coverage ratio of 4.0:1 means that for every $1 in interest owed, the company earns $4.

Interest coverage tells us whether a company will be able to pay its debts and continue its dividend if profits drop. For example, Wal-Mart has interest coverage of 11.2:1, meaning that only a small percentage of its profits are used for paying debts, so the company could absorb a large profit decline relatively easily.

5. Total return A stock’s dividend is only one part of an investment’s performance. Total return incorporates both dividend yield and share price appreciation.

Wal-Mart and Johnson & Johnson have produced average annual total returns of 10.1% and 10.7% over the past 20 years. To put this in perspective, if you had invested $10,000 in each of these stocks in 1995, you would have nearly $125,000 today!

6. EPS and revenue growth A strong history of earnings and revenue growth is a good indicator of a rising dividend. Ideally, a company’s earnings and revenue will grow at approximately the same rate, as you can see is the case with Wal-Mart

7. P/E ratio Perhaps the most widely used valuation metric, a P/E ratio is most useful for comparing companies in similar industries. The P/E is a measurement of how much a company’s stock costs in relation to its earnings

8. Share buybacks There are two main ways a company can return capital to shareholders: dividends and share buybacks. Many of the most solid dividend stocks also have large share repurchase programs.

Many investors actually prefer share buybacks to dividends. Dividends paid to investors are taxed; however, buybacks are not, even though they both represent a return of capital. Plus, most long-term investors reinvest their dividends anyway.

9. Beta When choosing dividend stocks for the long term, you certainly don’t want ultra-volatile stocks that dive and skyrocket with every market movement. A stock’s beta is a measurement of volatility. Specifically, it compares a stock’s volatility to that of the S&P 500.

Johnson & Johnson has a beta of 0.6, meaning it is 60% as reactive to market movements as the S&P 500. So, if the S&P drops by 10%, your shares of Johnson & Johnson can be expected to fall by approximately 6%

10. Return on equity (ROE) Return on equity, or ROE, is the amount of profit a company earns as a percentage of shareholders’ equity. A high ROE may indicate that a company has pricing power over its competition, or some other competitive advantage.

Wal-Mart has a ROE (TTM) of 19.78%, superior to its industry’s average of 17.65%. This indicates that Wal-Mart generates profits more effectively than its competitors because of its competitive advantages. In Wal-Mart’s case, its main advantage is its size.

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