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5 Signs of a Healthy Dividend
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5 Signs of a Healthy Dividend


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Here are five things that we look for in a healthy dividend-paying stock at Motley Fool Dividend Edge

Here are five things that we look for in a healthy dividend-paying stock at Motley Fool Dividend Edge

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  • 1. 5 Signs of a Healthy Dividend Todd Wenning, Advisor Motley Fool Dividend Edge 1
  • 2. A Strong Track Record• Look for companies with proven history of rewarding shareholders with increasing dividends• Bonus: A company with clear dividend policy• Example: Tesco (TSCO) – 27 consecutive years of increasing dividends – Dividend policy: Grow the dividend in line with earnings per share growth Metric 5 Year Growth (CAGR) Dividend Per Share 10.9% Earnings Per Share 10.6% 2
  • 3. Plenty of Dividend Cover• Look for companies with more than enough profit and free cash flow to cover its dividend payout• Ideally profit cover of 2 times (50% payout) or more• Free cash flow (FCF) cover of 1.5 times (67% payout) or more• Example: Exxon Mobil (US: XOM)Metric Value (in millions) Metric Value (in millions)Net Income $34,810 Net Income $34,810Dividends Paid $8,700 + Depreciation $15,241Profit Cover 4 times - Capital Expenditures $28,166 - Change in Non-Cash ($3,348) Working Capital = Free Cash Flow $25,233 Dividends Paid $8,700 FCF Cover 2.9 times 3
  • 4. A Good Balance Sheet• Look for companies with an investment-grade credit rating and sufficient interest coverage (EBIT / interest expense) of at least three times• Example: Johnson & Johnson (US: JNJ) – Credit rating: AAA (Standard & Poors) Metric Value (in millions) EBIT $16,361 Interest Expenses $478 Interest Coverage 34.2 times 4
  • 5. Sufficient Growth Opportunities• Look for companies with room to grow and avoid those that could be in decline• Key metrics: Sales growth, sustainable growth rate• Example: Reckitt Benckiser (LSE: RB.)Metric Value5 Year Annualized Sales Growth 14.9%Return on Equity 34.5%x Retention Ratio (1-Payout Ratio) 46.3%Sustainable Growth Rate 15.9% 5
  • 6. Management With Skin in the Game • Look for companies whose executives own enough shares that a dividend cut would have a material effect on their personal annual income • Examples:Company CEO – Shares Dividend Per Annual Dividend Owned Share IncomeNext Group (NXT) 1,638,010 £0.78 £1.28 millionPearson (PSON) 2,420,257 £0.387 £936,942IG Group (IGG) 3,800,000 £0.1875 £712,500 6
  • 7. Thanks for Reading!For more information, please visit: 7
  • 8. Notes• All data provided by Capital IQ, as of 11 May 2011• Disclosures: Todd owns shares of Johnson & Johnson and Tesco. The Fool (UK) owns shares of Tesco and Reckitt. 8