Top 10 Financial Ratios for Successful Dividend Investing

10. Total Shareholder Return

As dividend investors, there is a constant temptation to focus on yield alone. After all, the dividends a company is scheduled to pay are a very tangible return.

However, we are still total return investors – a 6% dividend yield does an investor little good if the stock price falls by 40% over the course of his holding period. Total shareholder return (TSR) measures the increase in a stock’s price, including any dividends paid.

For example, suppose shares of Coca-Cola were trading at $50 at the beginning of 2015. If Coke’s shares increased to $58 per share at the end of 2015 and the company paid dividends of $2 per share during the year, the stock’s TSR would be 20% [($58 per share stock price + $2 per share in dividends) / ($50 per share starting stock price) – 1 = 20%].

Well-managed businesses should create shareholder value over time by delivering a return at least in line with the broader market.

We will look at Ecolab Inc. (NYSE:ECL) as an example. The table below shows Ecolab’s total shareholder return (TSR) per year over three different time periods. The company’s TSR is then compared to the market’s to see how the stock performed.

As you can see, Ecolab meaningfully outperformed the market in each period, creating massive value for its shareholders. An investor who bought shares of Ecolab at the beginning of 2006 would have nearly doubled the performance of the market since then!

The chart below shows Ecolab’s TSR compared to the market, indexed at 100. A rising line means that the company’s stock outperformed the market. We can see that Ecolab outperformed the market in most years (a steadily rising line), giving us some confidence in the company’s business quality and management team.

Of course, few stocks have been home run investments like Ecolab. The TSR information below is for United States Steel Corp (X). Simply put, the company has been an absolute disaster for shareholders, returning -15.7% per year from 2006-2015 while the market gained 7.4% per year.

When a company has persistently destroyed shareholder value, investors really need to ask themselves why this trend would reverse any time soon. There is quite possibly something structurally wrong with the company’s business model or industry.

As John Templeton once said, “The four most dangerous words in investing are: this time it’s different.”