Top 10 Financial Ratios for Successful Dividend Investing

Dividend Safety & Growth Scores

At the end of the day, financial ratio analysis is only worthwhile if it produces actionable insights. In regards to dividend investing, we are primarily focused on using financial ratios to identify blue chip stocks that pay safe, growing dividends.

To help us with our effort, we created Dividend Safety and Dividend Growth scores, which analyze a blend of the most important financial ratios to rate the safety and growth potential of a company’s dividend. We look at a company’s payout ratios, debt levels, free cash flow generation, recession performance, near-term business trends, and more to generate our scores.

While investors should never take short cuts or blindly follow any quantitative system (as Charlie Munger would say, investing is not supposed to be easy), we like to use our Dividend Safety and Growth Scores to efficiently find high quality dividend stocks and avoid riskier sources of income.

Scores range from 0 to 100 with scores of 50 being average, scores of 25 or lower considered weak, and scores of 75 or higher considered excellent.

By checking a company’s Dividend Safety and Growth Scores, we can avoid businesses with riskier characteristics right off the bat.

Closing Thoughts

Having at least a basic understanding of the most important financial ratios for dividend investing is prudent.

While investing involves plenty of unknowns and a large degree of randomness at times, there are numerous avoidable mistakes that investors can sidestep when armed with an understanding of some financial ratios.

Disclosure: None