Profits are a matter of opinion; Dividends are a matter of fact.
Following on from my recent Views, I took a deeper dive into dividends during this fortnights episode of Fantastic Female Fridays.
I talked our wonderful #SavvyWomenInvestor audience through how
In a paper called "Why Dividends Matter ", there were three key things that jumped out at me:
- Dividend initiators and growers delivered a 9.6% historical total return within the S&P 500 between 1972 and 2010. In contrast, non-dividend paying stocks 1.7% return in the same sample.
- In low growth periods (i.e. the 1940s and 1970s), dividends were responsible for up to 75% of returns.
- While there are various profit figures available to analyse a stock, there is just one, unequivocal number when it comes to dividends.
However, what is a good dividend? How can you discern this quickly?
There are three key things to recap:
- What is the dividend yield?
Rather than look at a dividend in isolation, the dividend yield compares the dividend to what you have to invest to get it. If I have to pay €50 to get a €2 dividend versus paying €100, that's a very big difference! To put dividend yield in context, you can compare it to its own history, its industry peers or the average of the VectorVest database in the free stock analysis report.
- Is the dividend safe?
The key question to ask is whether the company is earning more than it's paying you? You can compare the EPS (Earnings per share) to the DPS (Dividend per share) to answer this, but it's even easier to use the Dividend Safety rating. If the stock has a DS rating above 50, that's very healthy. I gave the example of Dollar General, for example, which has a DS of 97. That's very close to the maximum of 99!
- Is the dividend growing?
Looking back, has the company been growing its dividend? Furthermore, is it expecting to continue doing so? I gave the example of Colgate which has grown the dividend on its common share every year for the past 57 years. If a company has a high predictability of dividend growth in the future, that also tells you the company is expecting to grow its profits to facilitate that dividend.