6 key metrics every dividend investor must track
There are many styles of investing depending on the thesis of the investor. Some common investing styles are growth, value, dividend, and dividend growth, for example. In this post, we’ll go into a bit more detail on dividend investing and the 6 key metrics dividend investors need to track to be successful.
Dividend investing strategies aim to generate a steady stream of income through dividend payouts with only a secondary focus on capturing capital growth through appreciation in stock prices or unit prices in the case of mutual funds and ETFs. This is an attractive investment strategy, particularly for long-term investors, and for those who want to balance the risk in terms of the vagaries of the equities markets, with the necessities of generating an income stream.
The biggest challenge of being a dividend investor is keeping track of paperwork. From dividend announcements to corporate actions that occur during reporting season, all that paperwork quickly becomes a task of its own.
Secondly, stock or unit prices usually drop after the ex-dividend date because the valuation of the underlying company or portfolio of companies in the case of a fund will decrease when dividends are paid out. This would result in a negative outcome for capital growth and will be reflected in the portfolio section of their online broker.
Thirdly, the investor has to check the share registry or the stock transfer agent for the amount declared and paid. The investor then has to cross verify with the bank account nominated to receive these dividend payouts.
The result of these challenges is that many dividend investors try to track all of this data in a custom spreadsheet. Keeping track of data between the broker and the share registry or stock transfer agent becomes tedious. Inaccuracies or incomplete data creep into the spreadsheet, and with every passing year, the only thing assured is more time spent gathering data and maintaining the spreadsheet.
By the very nature of dividend investing, it is often considered ‘set and forget’; you build a basket of reliable dividend earners, then sit back and enjoy the income stream that it generates. However, it’s important to at the very least keep track of some key metrics as guardrails for your portfolio. The following should be part of any dividend investor’s toolkit:
Simply put, this is the ratio of dividends to stock price. This metric simply tells you how much regular income you might get from the stocks you own. Dividend yield can be calculated with the following formula: Dividend yield = annual dividend per share/current stock price
For example, a company that pays a dividend of $5 annually with a current share price of $100 has a dividend yield of 5%.
Using Sharesight to look at the dividends to stock price movements for BHP, we calculate the dividend yield by adding up the two dividend payouts and dividing by the current share price. In this case that would be: $0.7545 + $1.311 = $2.0655. The current share price at the time of writing this blog post was $44.95. The ratio of these two numbers is 4.6%. By the very nature of the definition, the current share price can affect a stock’s dividend yield. If we had measured the same metric before the fall in stock price, the dividend yield would have been 3.9%.
Dividend yield in isolation is not a very useful metric. Dividend yields can increase if either the dividend payout increases or if the stock price decreases. If the stock price decrease is due to a fundamental issue with the underlying business, then you are buying into an underperforming company. Hence, the term dividend yield trap.
This metric measures how much of a company’s earnings (net income) are paid out as a dividend. If this number is too high, it means there is not much room for error in case of a downturn. If it's too low (like 0%), then it's not a dividend stock.
The dividend payout ratio can be calculated with the following formula: Dividend payout ratio = total dividends/income
Both the total dividends and the net income of the company will be reported on the financial statements at the time of releasing earnings by the company. The dividend payout ratio on a share basis is the ratio of the dividends per share by the earnings per share. For example, if a company’s total profits were $100,000, and its dividend is $25,000, then the dividend payout ratio would be 25%.
Unlike the dividend yield above, the dividend payout ratio is not influenced by the current stock price.
If you’re a dividend income or dividend growth investor, tracking the value of dividends from your investments over time is essential, particularly if you rely on dividend income to fund your lifestyle. If you track your dividends properly, you will have a clear view of how much income your dividend stocks generate.
To view the monthly income from your portfolio, the first step for any dividend investor is to get all their investments into Sharesight, including any investment property and fixed income securities. Using the Future income report, you can then change the date filter to see the monthly total dividend, distribution, and any fixed income you have received.
The monthly income looks like this:
With the Future Income Report, upcoming dividend income is broken down into a range of categories to help investors plan their cashflow.
Dividend reinvestment plans (DRPs or Drips) are a great way to increase exposure to a stock by automatically reinvesting dividends in new shares or units (in case of ETFs or mutual funds) instead of receiving cash. While it’s really advantageous to grow holdings in a company or a fund without having to pay any further brokerage, it does present a record-keeping challenge.
Sharesight helps keep track of DRPs/DRIPs in an automated manner that reduces the work investors need to put in. For example, as seen in the screenshot below, the cost base for every dividend reinvestment is automatically tracked, helping the investor make accurate tax filing records and decisions.
This is a bonus one for jurisdictions that have dividend imputation tax credits, also known as franking credits (particularly in Australia). For the individual investor, this franking credit entitles the investor to receive a credit for the tax already paid by the company on this dividend against their income when they complete their tax return. In cases where the tax already paid exceeds the individual’s marginal tax rate, the tax office will refund the difference in cash (under current rules).
It’s easy to track franking credits with Sharesight. For example, Telstra’s dividends are 100% franked. Telstra shareholders’ dividend distribution looks something like the example below in Sharesight:
Sharesight gives investors a clear breakdown of their dividend income, including franked dividends.
While this is not a pure dividend metric, it’s an important and comprehensive one that tracks the overall performance and health of the portfolio. As you can see from the key drivers of total annualised return, dividend return is just one of the components.
The main components that go into an annualised return are:
- Capital gains
- Dividends & distributions
- Currency fluctuations
- Brokerage costs
The way they come together is represented by the table from Sharesight below. By breaking the annualised return down into these components, it gives investors a clear view of which factors are contributing the most to their return, allowing investors to make more informed decisions about their portfolio.
With Sharesight’s advanced dividend tracking and performance reporting features, investors can access unparalleled insights into their investments at the click of a button. With Sharesight investors can:
- Automatically track dividend and distribution income from stocks, ETFs, LICs, and Mutual/Managed Funds – including the value of franking credits
- Use the Dividend Reinvestment Plan (DRPs/DRIPs) feature to track the impact of DRP transactions on your performance (and tax)
- Run powerful reports to calculate your dividend income with the Taxable Income Report
- Easily share access of your portfolio with family members, your accountant, or other financial professionals so they can see the same picture of your investments as you do
Disclaimer: The above article is for informational purposes only and does not constitute a product recommendation, or taxation or financial advice and should not be relied upon as such. Always check with your financial adviser or accountant to obtain the correct advice for your situation.
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