There’s SO MUCH DATA out there about nearly every single stock. It’s daunting. The amount of ‘content’ available would give Alvin Toffler himself a panic attack! So we need quick shortcuts to do a quick analysis. Here’s a couple!
This shortcut is simply the Dividend Yield plus the Dividend Growth Rate = Expected Total Return. My good golly, how wonderful! What an amazing shortcut that brings home the importance of both the Dividend Yield AND the Dividend Growth Rate ~ perhaps the two most important factors in dividend investing. Perhaps.
Here’s a chart that shows the math behind it:
Sure it’s not perfect, but it’s a good rule of thumb. And since we are predicting the unpredictable future, it’s close enough! The formula was created by Chowder, a now inactive member of SeekingAlpha.com. [If this is incorrect, please let me know!]
When searching for dividend growth stocks, it’s difficult to quickly compare stocks in different sectors. For example, comparing a Basic Materials stock with a Technology stock–where do we begin? To make it easier, we devised our rule-of-thumb DivSys Score™. Simply put, it’s the free cash flow growth rate added to the dividend growth rate. We offer the metric primarily calculated with 5-year stats since newbie stocks (that have only increased their dividend continually for a minimum of five years) may not have a 10 year score.
Our DivSys5 and DivSys10 scores are also great shortcuts as an indicator for potential growth. High free cash glow growth rate is strongly correlated with high total return, as is high dividend growth rate (although not as strongly correlated), and adding them together, we can get a sense of how they’ll perform. The higher DivSys score the better, generally. And for rules of thumb we need the word “generally” because it’s merely an indicator, not a crystal ball.
What are your favorite rules of thumb, shortcuts, quick-pick-tips, etc? We’d all love to know and, in these ‘trying times,’ would love some connective communication.