The Ultimate Dividend Quality Toolkit to Spot Unsustainable Payouts and Protect Your Portfolio
The Top Dividend Quality Metrics You Need to Know โ Key Ratios, Formulas, Terms and Checklist
Dividend-paying companies are like battle-hardened warriors, weathering storms and standing tall against the fiercest downturns. They're disciplined, confident, and willing to share their spoils with youโthe shareholder. But not all dividends are created equal.
The question is, how do you spot the wolves in sheep's clothing? How do you identify the unsustainable payouts that are just waiting to devour your hard-earned money? Letโs unlock the dark secrets of dividends.
Caution: This knowledge comes with a price โ once you see the truth, there's no going back. Are you brave enough to proceed?
Dividends are a portion of a company's earnings for the quarter or year that are distributed to shareholders. It's hard to overstate the importance of dividends to an investor's total return, as historically they have accounted for almost half of the total return on the stock market. Additionally, companies that pay dividends understand that the money belongs to shareholders.
Dividend-paying companies provide superior returns with lower risk, as dividends signify corporate financial discipline. Dividends are real payouts for companies that cannot be manipulated or repaid. When companies begin paying dividends, they are also unwilling to stop or cut them because it can drive the stock price downward and look bad for management's ability. Therefore, dividends are also a signal of the company's confidence.
Dividend-paying companies are generally more resistant to downturns. The dividend, if sustainable, provides a minimum level of positive return. This dampens the downward pressure from the market. And even better; good dividend-paying companies not only maintain their dividends during a downturn โ they actually raise them.
The conclusion is that a long history of high and growing dividends is a hallmark of quality companies.
When conducting a quality analysis of dividends, one should start by collecting the following data points as input:
Data points
Current dividend yield (-1 to -4 years) (Annual, latest reported)
Dividend per share (-1 to -10 years) (Annual, latest reported)
Current dividend payout ratio (-1 year) (Latest reported)
Previous payout ratio (-2 years) (Previously reported)