Both Procter & Gamble and Lowe’s have increased their stock dividends for more than 50 consecutive years, placing them in an elite group of companies known as the Dividend Kings. They’re also part of the Dividend Achievers, a trademarked property owned by Nasdaq. Dividend Achievers are S&P 500 index companies with more than 10 years of consecutive dividend increases.
Chevron has a 38-year streak of dividend growth. Dividend stocks can come from any industry, and the amount of the dividend and percentage yield can vary greatly from one company and sector to the next.
Dividend yield and other key metrics
Before you buy dividend stocks, it’s important to know how to evaluate them. These metrics can help you understand how much in dividends to expect, how reliable a dividend might be, and — most importantly — how to identify red flags.
Dividend yield
The dividend yield is the annualized dividend represented as a percentage of the stock price. For instance, if a company pays $1 in annualized dividends and the stock costs $20 per share, the dividend yield would be 5%.
Yield is useful as a valuation metric when you compare a stock’s current yield to its historical levels. A higher dividend yield is better, all other things being equal, but a company’s ability to maintain the dividend payout — and, ideally, increase it — matters even more. An abnormally high dividend yield could be a red flag, indicating investor concern that it may be on track to get cut.
Dividend payout ratio
This is the dividend as a percentage of a company’s earnings. If a company earns $1 per share in net income and pays a $0.50-per-share dividend, the dividend payout ratio is 50%. In general terms, the lower the payout ratio, the more sustainable a dividend is.
Cash dividend payout ratio
This is the dividend as a percentage of a company’s operating cash flows minus capital expenditures, or free cash flow (FCF). This metric is relevant because generally accepted accounting principles (GAAP) net income is not a cash measure, and dividends are usually paid in cash.
Various noncash expenses can cause a company’s earnings and FCF to vary significantly from one period to the next. This variability can cause a company’s payout ratio to be misleading at times. Investors can use the cash dividend payout ratio, along with the earnings payout ratio, to better understand a dividend’s sustainability.