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Evaluating Stocks Based on Dividend Growth

Monday, June 12, 2006
Some investors love stocks that come with high or above average dividends. These dividends can greatly increase your earnings over time with reinvestment programs. I personally think companies that issue dividends as opposed to trying to buy growth are more responsible for the long run. Long-term sustained dividend growth can be a great sign of financial stability and growth.

So how do we compare dividend growth you may ask? Well there are a couple steps involved, but it is not too difficult once you get the idea. After you decide which industry you want to explore, pull the dividend data for companies within this industry for about 10 years. (The relevant field will be different for different industries, for instance tech will be a LOT shorter.) Then average each firm’s yearly growth in terms of percentages. Average all the firm’s averages to get an industry average for dividend growth. (There is probably a figure pre-canned somewhere on a financial site but I have not found it.) Then you can compare your stock against the industry average.

A real simple valuation based on this would be:

Share Value = next dividend $ / (Industry Dividend Growth % – Firm Dividend Growth %)

While that value should be taken with a grain of salt, comparing the growth rate with other firms in the industry should be fairly useful in evaluating stocks that boast high dividends.

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