In This Article:
As Mark Lowe wrapped up chapter one of "Dividend Investing: Simplified - The Step-by-Step Guide to Make Money and Create Passive Income in the Stock Market with Dividend Stocks," he made a strong case for due diligence, even though dividend stocks are safer than many other types of stocks.
In chapter two, he provided nine key metrics and concepts that would guide an investor's due diligence, thus providing part of a road map for analyzing these stocks. We will look at the first four of them in this article.
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dividend growth rate is the percentage rate of annual growth posted by a specific stock over a specific period. It is available on the GuruFocus summary page for most stocks; this screenshot shows the details for Coca-Cola (NYSE:KO) at the close on Friday, Sept. 20:
The dividend growth rate is also an integral part of the dividend discount model, a tool for valuing stocks by computing the present value of future dividends. In other words, it is a way of quantitatively calculating the intrinsic value of a stock.
To calculate the growth rate, using the dividend discount model, use the formula "P = D1 / (r-g)", where "D1" is the dividend value for next year, "r" is the capital cost of equity and "g" is the dividend growth rate.
Alternatively, an investor can use the "linear method," which involves the use of historical data. Lowe prepared this example with the following dividend payments per year:
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2015: $1.00
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2016: $1.05
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2017: $1.07
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2018: $1.11
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2019: $1.15
Feed that data into the formula: Year X Dividend / (Year X -1 Dividend) - A. That allows us to calculate the growth rates within those five years:
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2015: Not applicable.
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2016: $1.05 / $1.00 -1 = 5%
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2017: $1.07 / $1.05 -1 = 1.9%
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2018: $1.11 / $1.07 -1 = 3.74%
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2019: $1.15 / $1.11 - 1 = 3.6%
Averaging those figures, we arrive at an annual growth rate of 3.56%.
Dividend payout ratio
This refers to the percentage of profit that is transferred to shareholders by way of dividends. It can be calculated in two ways:
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(Dividends per share / Earnings per share) x 100
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(Total paid dividends / Net income) x 100
As the formulas suggest, this explicitly shows the proportion of earnings going to shareholders and, implicitly, the proportion being kept by the company as retained earnings.
For investors, the question becomes: How much can a company pay and still have enough to maintain and grow future profits? Or, how many feathers can you pick from golden goose before you kill it?