4 metrics you can use to analyse dividends:

Intro:

A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns profits, it is able to pay a proportion of profits as dividends to the shareholders

Dividend yield:

•It tells you the amount of dividend paid by the company as a percentage of the market price

•The formula is Dividend per share/Market price

•Be cautious with too high or too low yields.

Dividend payout ratio:

•It tells you the amount of dividend paid by the company as a percentage of net profits

•The formula is Dividend paid/net profits

•Just like yield, be cautious with too high or too low payout ratios

•Alternatively you can use Dividend/op cash flow

Dividend growth rate:

•It tells you the CAGR of dividends over a period of time

•Look for stable & increasing dividends at a reasonable growth rate

5/10 ratio:

•This is one of the less popular ratios, But an important one. It tells you the momentum of dividends

•The formula is 5y dividend growth rate/10 y dividend growth rate

•A ratio below one indicates that the co dividend growth rate is declining over the recent past compared to the historical growth rate

•And vice versa if it is above one

Case study on Coal India:

Dividend yield of 10% which is too high

Payout ratio of 98% (5y avg) which is too high

Reasonable growth rate of 13%

5/10 ratio is negative 1 which indicates that the company has been decreasing dividends in the recent past

To conclude, look for good initial yield with a reasonable payout ratio, growth rate and has good momentum in the growth rate

Note: Never focus on dividends alone. Do check all other parameters. Have a great day.