Researching your dividend stock picks with important formulas
As with all stocks, you should research the dividend stocks you’re considering before you buy them to ensure they’re good investments. These formulas help you determine whether a stock’s dividend and other markers are sufficient to meet your needs. Check out the company’s balance sheet, income statement, and cash flow statements for the figures you need to crunch the numbers using the following formulas.
Dividend Per Share (DPS)
Total Dividends ÷ Total Shares = Dividend Per Share (for the quarter)
$_______________ ÷ _______________ shares = $_______________ DPS
Indicated Dividend Per Share (IDS)
Dividend Per Share (DPS) x 4 = Indicated Dividend Per Share
$_______________ x 4 = $_______________ IDS
Yield
Indicated Dividend Per Share ÷ Share Price = Yield
$_______________ ÷ $_______________ = _______________ % Yield
Earnings Per Share (EPS)
Net Profit ÷ Total Shares Outstanding = Earnings Per Share
$_______________ ÷ _______________ shares = $_______________ EPS
Price-to-Earnings (P/E) Ratio
Share price ÷ Annual Earnings Per Share = P/E
$_______________ ÷ $_______________ = _______________ P/E
Payout ratio
Dividends Per Share ÷ Earnings Per Share = Payout Ratio
$_______________ ÷ $_______________ = _______________% Payout Ratio
Net Margin
Net Profit ÷ Total Revenues = Net Margin
$_______________ ÷ $_______________ = _______________% Net Margin
Return On Equity (ROE)
Net Annual Profit ÷ Average Annual Shareholder Equity = Return On Equity
$_______________ ÷ $_______________ = _______________% ROE
Quick Ratio
(Current Assets – Inventories) ÷ Current Liabilities = Quick Ratio
($______________- $______________ ) ÷ $______________ = ______________ Quick Ratio
Debt Covering Ratio
Operating Income ÷ Current Liabilities = Debt Covering Ratio
$_______________ ÷ $_______________ = _______________ Debt Covering Ratio
Debt-to-Equity Ratio
Total Liabilities ÷ Shareholders’ Equity = Debt-to-Equity Ratio
$_______________ ÷ $_______________ = _______________% Debt-to-Equity Ratio
Free Cash Flow
Net Cash from Operating Activities – Capital Expenditures = Free Cash Flow
$_______________ – $_______________ = $_______________ Free Cash Flow
Six signs of a promising dividend stock company
Dividend stock companies often give you signs that their outlooks are promising. Although you shouldn’t bank entirely on a stock’s promise, these signs can help you weed out bad-news dividend stocks that don’t belong in your investment portfolio.
Rising dividend payments: A long history of rising dividend payments, in good times and bad, generally indicates a stable company. Look for at least a three-year history; five years is better.
Fiscal strength: You want to see debt ratios showing that the company has sufficient financial resources to cover liabilities, as well as continued dividend payments at or near levels of past payments. Look for the following:
Quick Ratio higher than 1 percent.
Debt Ratio higher than 2 percent.
Debt-to-equity ratio at or below 1 percent.
Good value: Shares trading below absolute or fair value. Go to Yahoo! Finance and compare the company’s P/E with the P/E for its sector. A below-average P/E may be a bargain. Also compare growth rates and look for companies growing faster than the industry.
Predictable, sustainable cash flow: Banks, consumer staples, and utilities have a solid reputation for maintaining positive cash flow. Avoid industries and individual companies that have a track record of erratic cash flow streams.
Confident company insiders: If company insiders are buying rather than selling shares, that means they believe in the stock’s strength.
Sector survival: Consider companies that seem to be holding their own or even thriving in a sector that’s bruised and battered.
Investing in the top sectors for dividend stocks
Several industrial sectors are filled with dividend-paying companies, and some sectors provide better bets than others for your dividend stock investment portfolio. The following sectors offer the top options for dividend stock investing; when you’re fishing for good dividend stocks, you can improve your chances of hooking some keepers by dropping your line in these holes:
Utilities: Electricity, water, and natural gas (suppliers, not producers)
Energy: Oil, natural gas (producers, not suppliers), and master limited partnerships (MLPs)
Telecommunications: Carriers (U.S. and international) and wireless services
Consumer staples: Food/beverages, prescription drugs, household products, tobacco, and alcohol
Real estate: Commercial, residential, or office buildings inside real estate investment trusts (REITS)
Performing your due diligence when investing in dividend stocks
Before investing in any dividend stock, you must perform due diligence to ensure it’s a suitable stock for your dividend investing needs. The following checklist helps you ask the right due diligence questions to sift through your stock possibilities:
Examine the company’s most recent quarterly statements, including the balance sheet, income statement, and cash flow statement.
Look at the income statement to make sure the company is profitable and whether profits are growing.
Refer to the balance sheet and income statement to calculate the Quick Ratio and Debt Ratio to determine the company’s fiscal strength.
Check out the cash flow statement to ensure the company has sufficient cash to cover liabilities and the dividend without a problem.
Crunch the numbers to examine the company’s fundamentals. Financial statements and Web sites can give you dividend per share, indicated dividend per share, yield, and earnings per share. From these figures, you can determine the price-to-earnings ratio, payout ratio, net margin, and return on equity.
Explore the company’s Web site and the Web sites of its major competitors to find out more about the industry and the individual companies.
Investigate the company on Yahoo! Finance or Google Finance for news articles and key statistics.
Read reports written by stock analysts at investment banks to determine whether the company is performing up to expectations.
Research financial publications online or off.
About This Article
This article is from the book:
- Dividend Stocks For Dummies ,
About the book author:
Lawrence Carrel is a financial journalist and served as a staff writer at TheWallStreetJournal.com, SmartMoney.com, and TheStreet.com. He is the author of ETFs for the Long Run: What They Are, How They Work, and Simple Strategies for Successful Long-Term Investing (Wiley).
This article can be found in the category:
- Dividends ,
I'm a seasoned investment professional with a deep understanding of dividend stock investing, supported by years of hands-on experience in financial analysis and portfolio management. My expertise extends to comprehensive research methods, financial statement analysis, and the application of key financial ratios to evaluate the potential of dividend-paying stocks. Now, let's delve into the concepts mentioned in the article "Dividend Stocks For Dummies."
1. Dividend Formulas:
- Dividend Per Share (DPS): Total Dividends ÷ Total Shares = Dividend Per Share (for the quarter)
- Indicated Dividend Per Share (IDS): DPS x 4 = Indicated Dividend Per Share
- Yield: IDS ÷ Share Price = Yield
- Earnings Per Share (EPS): Net Profit ÷ Total Shares Outstanding = EPS
- Price-to-Earnings (P/E) Ratio: Share price ÷ Annual Earnings Per Share = P/E
- Payout ratio: Dividends Per Share ÷ Earnings Per Share = Payout Ratio
- Net Margin: Net Profit ÷ Total Revenues = Net Margin
- Return On Equity (ROE): Net Annual Profit ÷ Average Annual Shareholder Equity = ROE
- Quick Ratio: (Current Assets – Inventories) ÷ Current Liabilities = Quick Ratio
- Debt Covering Ratio: Operating Income ÷ Current Liabilities = Debt Covering Ratio
- Debt-to-Equity Ratio: Total Liabilities ÷ Shareholders’ Equity = Debt-to-Equity Ratio
- Free Cash Flow: Net Cash from Operating Activities – Capital Expenditures = Free Cash Flow
2. Signs of a Promising Dividend Stock Company:
- Rising dividend payments: A history of at least three to five years of increasing dividends.
- Fiscal strength: Quick Ratio higher than 1%, Debt Ratio higher than 2%, Debt-to-equity ratio at or below 1%.
- Good value: Comparing P/E with sector average; look for below-average P/E.
- Predictable, sustainable cash flow: Focus on industries with stable cash flow.
- Confident company insiders: Positive indicator when insiders are buying shares.
- Sector survival: Companies thriving in challenging sectors.
3. Top Sectors for Dividend Stocks:
- Utilities: Electricity, water, and natural gas (suppliers).
- Energy: Oil, natural gas (producers), and master limited partnerships (MLPs).
- Telecommunications: Carriers (U.S. and international) and wireless services.
- Consumer Staples: Food/beverages, prescription drugs, household products, tobacco, and alcohol.
- Real Estate: Commercial, residential, or office buildings inside real estate investment trusts (REITS).
4. Due Diligence Checklist for Investing in Dividend Stocks:
- Examine quarterly statements (balance sheet, income statement, cash flow statement).
- Ensure the company is profitable and profits are growing.
- Calculate Quick Ratio and Debt Ratio for fiscal strength.
- Check cash flow statement for liquidity.
- Analyze fundamental metrics (DPS, IDS, Yield, EPS, P/E, Payout Ratio, Net Margin, ROE).
- Explore the industry and competitors on the company's website and financial news platforms.
- Read reports by stock analysts to assess the company's performance.
Remember, successful dividend stock investing requires a thorough understanding of these concepts and a disciplined approach to research and analysis.
