Dividend Analysis#

Dividends represent a tangible return to shareholders—real cash returned from company profits. For income-focused investors, dividend analysis is crucial for building sustainable income streams.

Key Dividend Metrics:

Dividend Yield = Annual Dividend / Stock Price
Payout Ratio = Dividends / Net Income
Dividend Coverage = EPS / Dividend Per Share

Dividend Yield#

Calculation#

Dividend Yield = Annual Dividend Per Share / Current Stock Price × 100

Example: $3.00 annual dividend / $60 stock price = 5.0% yield

Yield Interpretation#

Yield Range	Typical Situation
0%	Growth companies reinvesting all profits
1-2%	Growth-oriented, token dividend
2-4%	Balanced growth and income
4-6%	Income-focused, mature companies
6-8%	High yield, check sustainability
> 8%	Very high—potential red flag

Yield Trap

Extremely high yields often signal trouble. A 10% yield might mean the stock price crashed 50% and the dividend is about to be cut. Always investigate why yields are unusually high.

Yield by Sector#

Sector	Typical Yield	Reason
Utilities	3-5%	Regulated, stable cash flows
REITs	4-7%	Required to pay 90% of income
Consumer Staples	2-4%	Stable, mature businesses
Banks	2-4%	Regulated capital returns
Technology	0-2%	Growth focus, reinvestment
Biotech	0%	Burning cash on R&D

Dividend Payout Ratio#

Calculation#

Payout Ratio = Total Dividends / Net Income × 100

Or: DPS / EPS × 100

Payout Ratio Guidelines#

Payout Ratio	Interpretation
0-30%	Conservative, room for increases
30-50%	Healthy balance
50-70%	Moderate, less flexibility
70-90%	High, limited safety margin
> 100%	Unsustainable—paying more than earned

Industry-Specific Norms#

Industry	Typical Payout	Why
Utilities	60-80%	Stable earnings, regulated
REITs	90%+	Legal requirement
Technology	10-30%	Prefer reinvestment
Consumer Staples	40-60%	Mature, steady
Industrials	30-50%	Cyclical, need reserves

REIT Exception

REITs must pay at least 90% of taxable income as dividends to maintain tax-advantaged status. High payout ratios are normal and expected for REITs.

Dividend Coverage Ratios#

Earnings Coverage#

Dividend Coverage = EPS / DPS

Shows how many times earnings cover the dividend.

Coverage	Assessment
> 3.0x	Very safe, room to grow dividend
2.0-3.0x	Safe with comfortable margin
1.5-2.0x	Adequate but less flexibility
1.0-1.5x	Thin coverage, at risk
< 1.0x	Unsustainable—cut likely

Cash Flow Coverage (More Conservative)#

FCF Dividend Coverage = Free Cash Flow / Total Dividends

More reliable than earnings coverage since FCF represents actual cash.

FCF Coverage	Assessment
> 2.0x	Very safe
1.5-2.0x	Comfortable
1.0-1.5x	Adequate
< 1.0x	May need to fund from debt or cash reserves

Example: Comparing Coverage#

Metric	Company A	Company B
EPS	$4.00	$4.00
DPS	$2.00	$2.00
Earnings Coverage	2.0x	2.0x
FCF Per Share	$3.50	$1.50
FCF Coverage	1.75x	0.75x
Assessment	Safe	At Risk

Company B's dividend looks safe on earnings but is underfunded by cash flow.

Dividend Growth#

Dividend Growth Rate#

Dividend CAGR = (Current DPS / Past DPS)^(1/years) - 1

Dividend Aristocrats Criteria#

Companies with 25+ consecutive years of dividend increases are "Dividend Aristocrats." These include:

Company	Sector	Years of Increases
Johnson & Johnson	Healthcare	60+
Procter & Gamble	Consumer Staples	65+
Coca-Cola	Consumer Staples	60+
3M	Industrial	60+

Growth vs. Yield Tradeoff#

Strategy	Typical Yield	Typical Growth	Example
High yield	5-7%	0-3%	Utilities, REITs
Balanced	2-4%	5-10%	Consumer Staples
Growth focus	1-2%	10-15%	Technology

Dividend Safety Analysis#

Red Flags#

Warning Sign	Why It Matters
Payout > 100%	Paying more than earned
Declining earnings	Future dividend at risk
Rising debt for dividends	Unsustainable financing
Industry disruption	Business model threatened
Management changes	New leadership may cut

Green Flags#

Positive Sign	Why It Matters
10+ years of increases	Track record of commitment
Payout ratio declining	Growing into dividend capacity
Strong FCF coverage	Cash supports dividend
Stable/growing industry	Business fundamentals solid
Low debt levels	Financial flexibility

Practical Dividend Analysis#

Complete Assessment Framework#

Factor	Check	Weight
Yield vs. sector	Is it reasonable?	15%
Payout ratio	Sustainable level?	20%
FCF coverage	Cash supports dividend?	25%
Growth history	Consistent increases?	15%
Business stability	Earnings predictable?	15%
Balance sheet	Debt levels manageable?	10%

Example Analysis#

Metric	Value	Assessment
Stock Price	$50	—
Annual Dividend	$2.00	—
Dividend Yield	4.0%	Reasonable for utility
EPS	$3.50	—
Payout Ratio	57%	Healthy
FCF/Share	$4.00	—
FCF Coverage	2.0x	Safe
Dividend Growth (5yr)	6% CAGR	Solid
Debt/EBITDA	2.5x	Manageable

Conclusion: Dividend appears safe and sustainable with room for continued growth.

Dividend Reinvestment

Reinvesting dividends through DRIPs (Dividend Reinvestment Plans) compounds returns over time. A 3% yield reinvested for 20 years significantly boosts total returns.

Key Takeaways

Dividend Yield = Annual Dividend / Stock Price—compare to sector norms
Very high yields (>8%) often signal trouble—investigate before buying
Payout Ratio = Dividends / Net Income—below 60% is generally sustainable
REITs must pay 90%+ of income—high payout is normal for them
FCF Coverage is more reliable than earnings coverage for safety analysis
Dividend Aristocrats have 25+ years of consecutive increases
Red flags: Payout >100%, declining earnings, rising debt to fund dividends
Balance yield against growth—high yield often means low growth