In this sublesson, we will discuss the importance of growth in three key metrics for dividend growth investing: revenue, earnings per share (EPS), and free cash flow (FCF). Understanding the significance of growth in these metrics is crucial for identifying companies with the potential to consistently increase their dividends over time.

1. Revenue Growth: Revenue growth is vital for dividend growth investing because it reflects the company’s ability to expand its customer base, sell more products or services, and increase its market share. A company with consistent revenue growth is more likely to generate profits and have the financial capacity to pay and grow dividends.

Importance:

• Indicates a growing demand for the company’s products or services.
• Suggests the company is effectively competing in its industry.
• Provides a foundation for increased profitability and dividend growth.

1. Earnings Per Share (EPS) Growth: Earnings per share (EPS) growth measures the growth in a company’s net income allocated to each outstanding share of common stock. A consistent increase in EPS signifies the company’s ability to generate profits, which is crucial for supporting dividend growth.

Importance:

• Demonstrates the company’s profitability and financial health.
• Indicates the company’s ability to cover and increase dividend payments.
• Suggests effective management of expenses and efficient use of resources.

1. Free Cash Flow (FCF) Growth: Free cash flow (FCF) represents the cash generated by a company’s operations that is available for distribution to shareholders, debt repayment, or reinvestment. FCF growth is critical for dividend growth investors, as it directly impacts a company’s ability to pay and increase dividends.

Importance:

• Indicates the company’s ability to generate cash from its operations.
• Provides a direct source of funding for dividend payments and growth.
• Suggests the company has flexibility to reinvest in the business, reduce debt, or return value to shareholders.

Understanding the importance of growth in revenue, EPS, and free cash flow is essential for successful dividend growth investing. These metrics provide insights into a company’s financial health, profitability, and capacity to support and increase dividend payments. By focusing on companies with consistent growth in these key areas, you can identify dividend growth investments with the potential to deliver strong long-term returns.

Important Profitability Metrics

1. FCF/Revenue Ratio: The FCF/Revenue ratio measures the proportion of free cash flow generated from a company’s revenue. A higher FCF/Revenue ratio indicates that a larger share of revenue is being converted into free cash flow, which can be used to pay dividends, reduce debt, or reinvest in the business. To calculate the FCF/Revenue ratio, divide the company’s free cash flow by its revenue.
2. Return on Invested Capital – As it’s one of the most important ratios – the whole next lesson is dedicated to ROIC.