1. Forward Dividend Yield

The forward dividend yield is one of the most important metrics to consider when analyzing dividend stocks. It represents the annual dividend payment a company is expected to make, divided by the current stock price. The result is expressed as a percentage, showing the percentage return from dividends relative to the stock price.

Here’s the formula for calculating forward dividend yield:

Forward Dividend Yield = (Latest Quarterly Dividend X4 / Current Stock Price) × 100

A higher yield can indicate a more attractive investment, but it’s crucial to consider other metrics as well to ensure the dividend is sustainable and likely to grow over time.

The starting dividend yield is a crucial component of dividend investing success, because it represents the starting point from where your dividend return will compound from over time.

2. Dividend Growth Rate

Dividend growth rate measures the rate at which a company’s dividend payments have increased over a specific period. A consistently growing dividend suggests a healthy company with a commitment to rewarding its shareholders.

You can calculate the dividend growth rate by comparing the current dividend per share to the dividend per share in a previous period, using the following formula:

Dividend Growth Rate = ((Current Dividend per Share / Previous Period Dividend per Share) - 1) × 100

Investors typically look for companies with a consistent and sustainable dividend growth rate, as this can indicate future dividend increases.

3. Earnings and Free Cash Flow Payout Ratios

The earnings payout ratio and free cash flow payout ratio are essential metrics for evaluating the sustainability of a company’s dividend. These ratios show what percentage of a company’s earnings or free cash flow is being paid out as dividends.

The formulas for calculating these ratios are as follows:

Earnings Payout Ratio = (Dividends per Share / Earnings per Share) × 100
Free Cash Flow Payout Ratio = (Dividends per Share / Free Cash Flow per Share) × 100

A lower payout ratio indicates that a company is retaining a larger portion of its earnings or free cash flow, which can be reinvested for growth or used to maintain the dividend during challenging times. Generally, a payout ratio below 60-70% is considered healthy and sustainable.

4. Dividend Streak

Dividend streak refers to the number of consecutive years a company has paid and increased its dividend. A longer streak indicates a strong commitment to rewarding shareholders and a history of financial stability.

While a longer dividend streak is generally a positive sign, it’s essential to consider the other metrics discussed earlier to ensure the company’s dividend is sustainable and likely to continue growing.

Summary

In this lesson, we covered four key dividend analysis metrics—forward dividend yield, dividend growth rate, earnings and free cash flow payout ratios, and dividend growth streaks. By understanding and utilizing these metrics in your analysis, you can make informed decisions when selecting and investing in dividend-paying stocks. In our next lessons we will discuss other fundamental factors that support growing dividend payments.