I am a big fan of companies that make it a regular habit of dialing up a dividend. This is why I have been such a proponent of the dividend aristocrat group. Nothing perturbs me more though than to buy into a 2% dividend stock that I believe will crank up its rate only to be forced to wait multiple years before seeing that increase. To counteract this here is a simple parachute that can increase your confidence that a rate will increase.
In order to be confident that our investigations will be worthwhile it is important to see how long key people stay with the company. If the CFO, CEO and others are spinning through the company like a revolving door then your company has changed or is changing- investigation into it’s past may not indicate likely actions in the future. If however you find that current key positions have been with the company for some time then we can proceed with our investigation.
Investigate previous payout ratios
A payout ratio shows you what percentage of the net income is being paid out to shareholders. These rates can be anywhere from 10% -110% depending on the dividend paying company’s industry and financial condition. Having a low rate doesn’t necessitate a dividend increase, or conversely having what appears to be a higher rate doesn’t mean that an increase won’t happen. The task is to see what that payout ratio was the last few times an increase was done. This information can be found by understanding how the dividend payout ratio is calculated (Dividends / Net Income) and then retrieving the information from previous year’s financial statements on morningstar or the company’s own investor page.
Bring it together
People are creatures of habit. I have found that if you have the same CFO, CEO and the same payout ratio as the last time a dividend rate was increased you are very likely to see the same again. Conversely if these factors are not present you are very likely to end up disappointed despite what you might think is a fair current payout ratio. Simple but true.