Dividend Quality

Dividend investors should pay attention to the quality of dividends. Here are several factors to consider:

1) Smoothed earnings,
2) Earnings growth,
3) Payout ratio,
4) Credit rating and
5) Dividend history.

Benjamin Graham recommended looking at the previous decade of earnings and the latest three years of earnings. The latest decade shows whether earnings support continued dividend payments. Every company has an occasional down year. A decade tells a more accurate story. The latest three years show whether earnings are growing. Both are important.

A low payout ratio is usually a plus. It suggests future dividend increases. High payout ratios are not always bad, however. Some industries have very stable earnings. They can support higher payout ratios.

A company’s credit rating is a good clue as to its overall health.

Dividend history tells you a lot about management’s attitude towards its shareholders. It is not perfect. But a long history of dividend growth is a definite plus.

It helps to consider other indicators of value as well such as price to sales and price to book. Use limit orders and price discipline, as always.

Have fun.

John Walter Russell
March 3, 2008