Using Dividend History to Evaluate Stock Investments

Some believe that you can gauge your investment using stock dividend history. Under this approach, you consider the breadth of a stock’s dividend history, looking for certain characteristics. A stock with a long history that has remained stable, not missing payments or decreasing the amount, is considered favorable. You also would ideally see a regular history of increasing dividend payments, particularly relative to stock price. As much as you want to see a steady dividend amount, you prefer to see a steady dividend-payout ratio. The dividend-payout ratio is the annual dividend amount divided by the earnings. When this amount remains steady, you know that company is distributing a consistent percentage of its earnings. This is a sign that the company is stable and able to sustain its current lines of business.

The drawback to using this method of analysis is that you cannot make an assessment of any company that does not pay dividends. Many growth companies do not pay dividends, so a large and significant segment of the investment universe is lost. Furthermore, dividend policy tends to be backward-looking, meaning that by the time a problem shows up in the dividend history, the stock may have already experienced a significant decline.