In evaluating a company as a potential income investment, I look at its calculated fair value, Ability to generate cash, debt position and present value of dividend stream versus alternative “safe” investments (NPV MMA differential).
Additionally, I look at four other metrics that, on their own, may not be as important as the ones above, but overall, they provide a good insight into a stock’s potential success as a dividend investment. Here are the other four key metrics I look at when evaluating a dividend stock:
I. Dividend growth rate:
The dividend growth rate is a key metric in many calculations. So I use a conservative estimate like this: The minimum dividend growth rate is the average annual growth rate of 1, 3, 5, 7, 10 years, or 15% if the dividends have risen above 15% on average in each of the 4 year periods within the last 10 years history. How this is calculated you can calculate in my model D4L-PreScreen.xls. This metric is true when the dividend growth rate is 12% or more.
II. Years Div. Growth:
Years of consecutive dividend growth. How long a company has been raising its dividend is a strong indication of how committed the company is to continuing to do so in the future. This metric is valid for 15 or more years.
III. Rolling 4 year old Div. > 15%:
Dividends double every 5 years when they increase by 15%. This test is correct if, over the last 10 years of history, dividends have increased by an average of more than 15% over the next 4 years.
IV. Years to> MMA:
The number of years until a dividend is paid out exceeds the profit of a hypothetical money market account with an average interest rate of 20 years. This metric is true when the number of years is less than 5.
Taken together, these are difficult metrics. Of the 150+ stocks I currently follow, only three had all of the above metrics. They are:
Texas Instruments Inc. (TXN) is one of the world’s largest manufacturers of semiconductors. The company also makes scientific calculator products and DLP products for televisions and video projectors.
– Yield: 2.4%
– Dividend growth rate: 15.0%
– years Div. Growth: 18
– Yield: 2.5%
– Dividend growth rate: 12.0%
– years Div. Growth: 33
MEC Industrial Direct (MSM) is a direct marketer serving a variety of industrial products to customers in the United States. The focus is on maintenance, repair and operation (MRO).
– Yield: 3.5%
– Dividend growth rate: 12.9%
– years Div. Growth: 17
These metrics focus on compound dividend growth, which is important to the successful investor in dividend growth stocks. In my dividend analysis worksheet, a company gets a star if two of the above metrics are true.
Full disclosure: Long TRO, TXN.
On the subject of matching items