The payout ratio
The payout ratio is the percentage of a company’s annual earnings per share that is paid out as cash dividends per share, represented as a percentage of total earnings. Divide the total dividends paid by the net income earned to arrive at this figure. A payout ratio below 60% is considered good.
Earnings per share (EPS)
EPS is determined by dividing a company’s earnings by the number of common shares outstanding. The EPS statistic normalizes a company’s earnings to value per share. The best dividend-paying stocks are those that have demonstrated the ability to consistently increase earnings per share over time and, therefore, improve their dividend. Earnings growth is often an indication of long-term competitive advantages. The resulting figure is a measure of a company’s profitability.
Dividend coverage ratio
The dividend coverage ratio, often referred to as dividend coverage, is a financial indicator that determines the amount of dividends a company can pay out to its shareholders. The dividend coverage ratio is calculated by dividing the company’s net income by the dividend distributed to shareholders. The dividend coverage ratio shows how much of the company’s net income is distributed to common shareholders. The higher the dividend coverage, the better.
Net debt to EBITDA
The net debt to EBITDA ratio is a measure of debt that illustrates how long it would take a company to repay its debt if net debt and EBITDA remained unchanged. The ratio can be negative if a company has more cash than debt. The debt/EBITDA ratio is similar, but net debt excludes cash and cash equivalents, which is not the case for the conventional ratio. The net debt to EBITDA ratio is a measure of a company’s leverage and its ability to service its debts. The lower it is, the better.
Free cash flow to equity
It is a measure of the amount of equity used. The free cash flow to equity ratio measures the amount of cash available to shareholders of a company after all costs, reinvestments and debts have been paid. Analysts frequently use the FCFE statistic when trying to estimate the value of a company. Although the FCFE calculates the amount accessible to shareholders, this is not always equal to the amount paid to shareholders.