10 Metrics Dividend Investors Need to Know

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Matt Frankel, Investment Planning 10 Metrics Dividend Investors Need to Know 1

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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. 2

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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. ???????????? ??????????= ?????????????????? ???????? ???????????????? ?????? ????????? 3 November 28, 2015

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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. November 28, 2015 4

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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. ???????????????? ??????????= ???????????? ???????????????? ????????? ?????????? 5 November 28, 2015

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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. November 28, 2015 6

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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? While past performance doesn’t guarantee future results, a strong history is likely to continue. 7 November 28, 2015

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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). November 28, 2015 8 Two examples

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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! November 28, 2015 9 Two examples

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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. ???????????????? ????????????????= ?????????????? ???????????????? ???????????????? 11 November 28, 2015

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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. November 28, 2015 12

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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. For example, if a stock pays a 4% dividend and its share price rises by 10%, its total return is 14%. A stock with a high total return can build incredible wealth over long periods of time. 13 November 28, 2015

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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! November 28, 2015 14

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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 15 November 28, 2015

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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 16 November 28, 2015

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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. 17 November 28, 2015 Photo: Flickr user Steven Dipolo

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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. November 28, 2015 18

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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. 19 November 28, 2015

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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% November 28, 2015 20

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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. ??????= ?????? ???????????? ?????????????????? ?? ? ?? ???????????? 21 November 28, 2015

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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. November 28, 2015 22

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