Dividend Safety & Reliability - A stock's dividend safety and reliability is determined by its dividend payment history, its current financial health, and its volatility in relation to the market as a whole. A total of 5 points available.
- # of Consecutive Dividend Payments - The longer a company has been paying a dividend, the more ingrained the dividend payment is part of the company culture and the less likely it would be removed.
10 to 25 Years = 1 Point
Greater than 25 Years = 2 Points
- Debt to Total Capital - Too much debt can hinder dividend growth as cash is going to debt and interest payments. Debt includes both long-term and short-term debt and can easily be found on the liabilities side of the balance sheet. Total capital is a combination of debt and shareholders equity. When you divide debt by total capital we want a rate less than 75%.
Less than 75% = 1 Point
- Free Cash Flow Payout Ratio - The percentage of free cash flow paid out in dividends for the year. The lower the percentage the safer the dividend and greater potential for future increases. We want a rate less than 80%.
Less than 80% = 1 Point
- Beta - Beta is a metric that measures volatility of a stock as it compares to the market as a whole. We are looking for a non-volatile investment so a beta score less than 1.0 is ideal.
Less than 1.0 = 1 Point
Dividend Growth - Although growth isn't as important when we are buying for current income, we still want a history of increases as well as demonstrated ability to keep up with inflation. A total of 3 points available.
- # of Consecutive Dividend Increases - The longer a company has been consistently raising a dividend, the more ingrained the dividend increase is part of the company culture and the less likely it would be changed.
10 to 25 Years = 1 Point
More than 25 Years = 2 Points
- 3 Year Avg Dividend Growth Rate > Inflation - The company needs to be raising its dividend to at least stay ahead of the rate of inflation. The inflation rate we will use is a flat 3%
3 Yr avg dividend growth > 3%
Fair Value - If we're going to buy a stock, we don't want to purchase it went its overvalued. We will evaluate an income stock's valuation by its P/E and Yield. Total of 2 points available.
- Current P/E < Avg 5 Year P/E - If the current P/E is less than its average 5 year P/E, then we are getting the stock cheaper today than in the past.
Current P/E < avg 5 year P/E = 1 Point
- Current Yield vs Avg 5 Year Yield - A higher yield today vs the past is a sign that the stock is selling at a more favorable valuation.
Current yield < avg 5 year yield = 1 Point
With 10 points available, we can break down the total to get a rating on our stock
- 9-10 Points: Very Strong Income Stock
- 7-8 Points: Strong Income Stock
- 5-6 Points: Hold, revisit in within a year
- < 5 Points: Weak Income Stock, revisit after a year
I hope to put my first stock through this analysis very soon. As always, readers are welcome to send me stocks they'd like analyzed via the contact me page.