As a dividend growth investor, you can utilize a bunch of metrics to help you pick solid and growing companies like payout ratio, dividend yield or dividend growth. However, there are also some other numbers you can use to evaluate the performance of your portfolio as a whole.
Today, we want to look at the annual forward dividend and why I think this is maybe the most important measurement of your dividend portfolio.
Note: I have read about the annual forward dividend the first time on the Dividend Investor Blog! He uses the term annual forward dividend yield, which I think is incorrect as the yield is a percentage value. But I may be incorrect here. Anyway, it’s a great read and a much more sophisticated dividend investor than I am! So give this blog a try!
Without further ado, let’s dive in.
You are an income investor
You can compare your returns to the invested money easily. If your portfolio was $1,000 at the end of 2017 and grows to $1,100 in one year without adding or selling shares, it’s obvious that your stocks had a growth of 10%. This is a great number to use and works for most investors.
There are other things you can look at like performance compared to the market. If the market (e.g. S&P 500) made 8% in 2017 and your portfolio has been increased by 10%, then you have beaten the market by 2%. If you do this over the long-term, you are probably a very sophisticated investor and doing pretty fine.
Note: It’s very important here that with both of these numbers you shouldn’t just look at the short-term gains. If you beat the market in 2017 by 2% and lose in the next year by 10%, the better performance in 2017 is nearly worthless. So try to look at your 5- or 10-year performance.
Anyway, as a dividend investor, you have special needs. You are an income investor or at least produce an income with your stocks every year. Therefore, you can use values that are specific to your dividends. Let’s look at those next.
Why ‘dividends paid in this year’ are not a good tool
Now, you may think that you could simply look at the dividends paid in this year. But be cautious! This can lead to poor investment decisions and I will show you how.
Let’s say my goal is to reach $240 in dividends in 2018. I find a pretty good stock that pays out a huge dividend, has a low payout ratio, a solid business, and a nice dividend growth. Overall a great company at a cheap price. They pay out their dividend in February and July, so I can easily buy them in January and add an excellent business to my portfolio.
Later in the same year, they are even lower priced and obviously a bargain. But it’s November and I want to reach my goal of $240 paid in dividends. I have only $230 and I need to add companies that pay out their dividend in November or December, otherwise, I will not be able to accomplish this goal.
As a result, I buy a less attractive company just because I want to have a certain amount of dividends paid in 2018. You should never pick a company because of the month when they are paying the dividend! You want to have good and solid companies and nothing else! If all of your companies pay out their dividends in January, that’s still fine! I rather have this situation than a lot of bad companies which are giving me dividends every single month.
What the annual forward dividend is
The annual forward dividend is the sum of dividends you will receive in the next 12 months. If you buy a company in July that pays out its dividend in May (therefore, in the next year), you will still increase the annual forward dividend. Let’s look at an example:
You have an annual forward dividend of $200. It’s July 2018. Now you make a big purchase of a company that pays out its dividend in May. You buy shares of these company for $1,000 and they have a dividend yield of 5%. This means your next dividend payment of this company in May 2019 will be $50. Your annual forward dividend is now $200 + $50 = $250.
Why the annual forward dividend is a good metric
These $50 of the example above wouldn’t count in your number of dividends paid in 2018. Even though, they make your portfolio much better. The annual forward dividend has a lot of other advantages:
- It’s motivating! With every purchase or dividend increase, this number also goes up. You don’t have to wait many months until the dividends are paid out to see a change.
- You can make decisions based on the underlying business and don’t have to look at the payment dates!
- Your purchases in December count as much as your purchases in January. You move from looking at the calendar year to looking at the next 12 months. (Obviously, you shouldn’t just look at the next 12 months as well. You want to hold those companies as long as possible. Pick solid growth over high yield companies in general!)
- It’s easier to set goals. It’s hard to make assumptions for dividends paid in this calendar year if you don’t plan every purchase ahead. This is not possible because of the price changes. With the annual forward dividend, you can find more accurate numbers to plan with.
You see, overall the annual forward dividend is a great number to evaluate your dividend stocks. You want to have an income later on. There are (should be) two phases in dividend investing:
- Accumulation of dividends
- Using/spending that dividends
The annual forward dividend gives you a great overview of how far you are to get to the second phase which obviously depends on your life, goals, expenses, etc.
What other measurements do you use to evaluate the performance of your dividend portfolio? Let me know by leaving a comment in the comment section below.