ruly Growing dividend: 8 criteria to assess a sustainable dividend
A preset strategy to analyze a company whose dividend rises steadily: each criterion explained, where the thresholds come from, and the traps of a high dividend yield.
Published
A preset strategy, read-only: duplicate it to adapt it. The thresholds are common benchmarks, not rules, and a strategy verdict never tells you what to do with a stock.
The criteria and their thresholds
| Criterion | Criterion met | To monitor | Criterion not met |
|---|---|---|---|
| Dividend yield | 2.5% to 6% | 1.5% to 2.5% or 6% to 8% | < 1.5% or > 8% |
| Payout ratio (dividends / earnings) | ≤ 60% | 60% to 80% | > 80% |
| FCF payout ratio (dividends / FCF) | ≤ 60% | 60% to 80% | > 80% |
| Consecutive years of dividend increases | ≥ 10 years | 5 years to 10 years | < 5 years |
| Dividend growth (annual average over 5 years) | ≥ 5% | 2% to 5% | < 2% |
| Net debt / EBITDA | ≤ 2.5 | 2.5 to 3.5 | > 3.5 |
| Positive earnings every year for 10 years | Yes | No | |
| Yield against its 5-year average (calculated) | ≤ 0% | 0% to 10% | > 10% |
Thresholds read from the preset strategy in the app. A calculated criterion is worked out by the app from two figures you enter.
Who it is for
This strategy is for investors who expect a stock to provide a steady income that rises over time. It follows the “yield” style of the factor families, with one more point of attention: the company’s ability to keep paying, and raising, that dividend.
A high yield is not enough. A dividend paid on credit, or larger than earnings, often ends up being cut. The strategy therefore looks for a balance between the current yield, the share of earnings paid out and the track record.
The 8 criteria, one by one
Dividend yield
This is the annual dividend divided by the share price. The criterion is a range: green between 2.5 and 6%, orange between 1.5 and 2.5% or between 6 and 8%, red outside. A yield that is too low offers little income. A very high yield is often a sign that the market doubts the next payment. See the dividend yield entry.
Payout ratio (dividends / earnings)
It measures the share of earnings paid out to shareholders. Up to 60%, the company keeps enough to invest and absorb a bad year. Above 80%, the slightest drop in earnings puts the dividend under pressure. See the payout ratio entry.
FCF payout ratio (dividends / FCF)
The same ratio, measured on free cash flow rather than accounting profit. It matters more, because a dividend is paid in cash. A low payout on earnings and a high one on FCF signals profit that is not turning into cash.
Consecutive years of dividend increases
A long run of increases shows that management makes the dividend a priority, across several economic cycles. Green requires 10 years of increases in a row, orange 5 to 9 years. Some dividend indices require 25 years, a level that few European companies reach.
Dividend growth over 5 years
A dividend that stands still loses some of its purchasing power to inflation every year. The criterion uses the average annual growth of the dividend per share over 5 years: green at 5% or more, orange between 2 and 5%.
Net debt / EBITDA
A heavily indebted company has to pay its lenders before its shareholders. The threshold is a little looser than for quality (2.5 instead of 1.5), because dividend sectors such as utilities often carry more debt with stable revenue.
Positive earnings every year for 10 years
A dividend struggles to survive when earnings turn red. This yes or no criterion checks that the company has not posted a loss in ten financial years. See the earnings consistency entry.
Yield against its 5-year average
This criterion compares the current yield with its 5-year average, which places today’s share price against its past. A yield above its average means a relatively low price for the same dividend. The app works out the gap from the two yields you enter: green at or above the average, orange up to 10% below it.
Why these thresholds
The payout thresholds (60% and 80%) and the yield range follow benchmarks widely used by analysts and dividend-focused websites. The 10-year run of increases is a compromise: long enough to cover a cycle, short enough not to rule out almost every company outside the United States.
You can adapt them in a copy of the strategy. A real estate company or a network operator pays out a large share of its earnings by nature: a higher payout is normal there. A company that has just started paying a dividend has no track record yet.
Limits
A record of increases does not promise the next one. Dividends can be cut or suspended at any time, as several recent crises have shown.
Dividend taxation, which depends on your country and the type of account, is not part of the strategy. Real estate companies (REITs) are better assessed with a payout measured on operating cash flow than on earnings, and banks with solvency ratios that the strategy does not include.
Each criterion’s verdict describes the sheet against the strategy. The decision remains yours.