7 Golden Dividend Metrics
Before you invest, consider these metrics.
Today marks the beginning of the Dividend Talks Newsletter journey and I hope you are all as excited as me!
Today we will also start at the beginning of an investing journey and focus on 7 key metrics when analysing stocks to add to your portfolio. Some are more important than others but every one of these should be considered.
Criteria 1 - PE Ratio < S&P 500
PE Ratio = Share Price/Earnings Per Share
(Often considered a measure of the markets expectation of the Company’s future growth earning, and provides insight into how much investors are willing to pay for each dollar of earnings generated by the Company.)
What we are looking for here are Companies that are trading lower than the S&P 500 based on the price to earning ratio. Currently this is sitting at around 22. By filtering for this we are expecting to see Companies that are lagging behind the S&P 500 that we would expect to catch up and are therefore “potentially” undervalued.
Criteria 2 - Dividend CAGR 10Y > 4%
Dividend CAGR (Compounded Annual Growth Rate) measures the average annual growth rate of dividends paid by a Company over a specific period.
We use 4% as a minimum as the average US inflation rate over the last 40 years was 4%, if we are getting less than that in our dividend increases, or even our salary or other income producing assets then it means we are losing our purchasing power and taking a pay cut.
We want to see 4% as a minimum but ideally double digits, 10%+.
Criteria 3 - Cash Flow Payout Ratio < 60%
Cash Flow Payout Ratio = Annual Dividend Per Share/Free Cash flow Per Share
Note: We use cash flow payout as opposed to earnings payout as earnings data is susceptible to manipulation by management through accounting.
This metric measures the proportion of a Company’s cash flow that is paid out as dividends. Anything above 100% is a huge red flag which indicates that management are paying out more in dividends than they are generating in free cash flow.
Personally, I like to see below 60% as it gives me faith that management are able to offer those double digit dividend increases that we love to see as investors.
Criteria 4 - Fair Value (Discounted Cash Flow Model) 10%+
If you’ve been watching my YouTube videos you know that one of the models we use is the Discounted Cash Flow Model, which in my opinion is the best model to use as you are valuing a Company based on the present value of it’s future free cash flows.
You can grab a copy of this model here:
https://www.buymeacoffee.com/dividendtalks/extras
This metric filters for those Companies that have at least 10% upside per this model.
Criteria 5 - Upside Valuation 10%+
What I like to see when researching Companies is not only the fact that I have calculated that a certain stock I’m reviewing has 10% upside but also seeing that Wall Street also expect 10%+ upside.
Now one thing to note here is that we shouldn’t place any reliance on what Wall Street say and that whilst this is part of our investment analysis we do not solely rely on it.
Criteria 6 - EBIT Margin > 10%
EBIT Margin = (Total Revenue - Cost of Goods Sold - Operating Expenses)/Total Sales x100%
The EBIT margin is a margin that provides insight into the Company’s ability to generate the profit from it’s core operations. It also measures the percentage of each dollar of revenue that directly translates to operating profit.
A higher margin is favourable as it suggest higher operational efficiency and profitability.
Criteria 7 - ROIC > 10%
Return on Invested Capital (ROIC) = (Net Operating Profit after Tax/Total Invested Capital) x100%
A ROIC above 10% gives us faith that management are able to effectively allocate their capital.
Now whilst these are not an exhaustive list of metrics to consider the ones I would list as most important are researching Companies with the below:
High ROIC (+10%)
High 10Y Dividend CAGR (+10%)
Low Free Cash Flow Payout Ratios (<60%)
As per each stock analysis deep dive we do on the channel other things to consider include:
Insider Buying/Selling (Insider buying can be seen as bullish as insiders tend to only buy if they believe the share price will increase over time, whereas insiders can sell for many reasons including financial and personal reasons).
Latest Quarterly reports from management
Industry performance
Share Buy Backs/Share Issuances
I hoped you enjoyed this one, and look forward to many more.
Dividend Talks.