Find Dividend Stock Picks by Estimating Dividend Growth Rate
A good way to find dividend stock picks is by looking at specific aspects of a dividend-paying stock in order to estimate the dividend growth rate of that stock into the future. For investors who are interested in more stable stock investment choices and those investors looking for income streams, dividend-paying stocks can be a good choice. Unlike small cap stocks, these more mature companies usually see stability in their stock price and the best of these stocks will increase their dividend payouts over time.
The Value of Dividend Growth
If an investor can get a good handle on the history and stability a company has demonstrated regarding the payment of dividends and the growth of those dividend payments over time, they will have a good idea of the value of holding that stock into the future. As dividend payments grow, shareholders not only enjoy a larger income stream, but the probability of a higher stock price (capital appreciation of their investment) over time.
Understand the Dividend Payout Ratio
The dividend payout ratio is a measure that is used to determine the percentage of earnings a company pays to its shareholders in the form of dividends. The formula for the dividend payout ratio can be written as:
If a growing company maintains a consistent dividend payout ratio, the dividend payment stream to its shareholders will grow.
Know the Plowback Ratio
The plowback ratio is a measure often used in fundamental analysis to determine a company’s remaining earnings after it has paid out dividends. A high plowback ratio would indicate a good amount of resources available to the company to foster growth. The opposite of the dividend payout ratio, the formula for the plowback ratio can be written as:
Factor in Return-on-Equity
A company’s return-on-equity (ROE) is a measure used to determine the level of profits a company is generating relative to its invested capital. A high ROE (more specifically, return on unlevered equity) indicates a high level of return for each dollar it invests in itself. Companies that show a consistently high ROE are putting their dollars to use wisely.
Calculate Estimated Dividend Growth
When you know a company’s plowback ratio and ROE, you can estimate its dividend growth rate for comparison against other dividend-paying stocks.
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.
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