27th Nov 2023

5 best dividend ratios explained

Dividend ratios offer a window into the financial health and future prospects of companies. If you use them properly it will allow you to properly assess ability to generate, sustain, and grow dividend payments.

1) Dividend Yield

Shows how much a company pays out in dividends each year relative to its stock price. This will give you glimpse of what amount of dividend you get from company. There are two types of this ratio:

(Current) dividend yield: It is calculated by dividing the annual dividends per share by the price per share.

Forward Dividend Yield: Estimate of a company's dividend yield over the next year, based on recent dividend payments. Instead of using past dividends, it uses the sum of the company's expected future dividends over the next year

2) Dividend Payout Ratio

Calculated either as the annual dividend per share (DPS) divided by the earnings per share (EPS). It shows what portion of a company's annual earnings per share is paid out as cash dividends.

High payout ratios indicate higher risk of reducing future dividend or that company doesn’t invest in itself.

Investors should compare a company's dividend payout ratio with industry averages or similar companies.

3) Dividend growth

Evaluate the growth in a company's dividend payments over a three-year period. This ratio helps investors understand how a company's dividend payouts have changed over time, particularly focusing on its growth or consistency. You can usually see two types:

CAGR growth: Indicated average annual growth over period
Absolute growth: Indicates total change over period

4) Dividend Coverage Ratio

Calculated by dividing a company's annual EPS by its annual dividend. This ratio indicates how many times a company could pay dividends to its common shareholders from its net profit for a specific period. A higher dividend coverage ratio is generally more favorable.

5) The Free Cash Flow Dividend Payout Ratio

Free Cash Flow (FCF) is metric that shows the amount of cash a company generates after accounting for the cash outflows (expenses in simple words). This is important for few different metrics.

At dividend.watch we like to use one powerful ratio called Free Cash Flow Dividend Payout Ratio

Is a financial metric that compares the dividends a company pays to its shareholders to the amount of free cash flow it generates. This ratio is important because it helps investors understand how much of the company's cash from operations is being used to pay dividends, and whether this level of dividend payment is sustainable.

It’s also part of our dividend score algorithm.

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