The Untouchable Dividend Payers
The methodology that gets me to the Eight Untouchables rests with an analysis of the dividend payout ratio, which has the twin characteristics of being one of the simplest and most useful ratios in fundamental equity analysis.
Simply put, the dividend payout ratio is: Dividends Per Share ÷ Earnings Per Share. For you purists out there the DPR is: Cash Common Dividends/(Income Before Extraordinary Items-Minority Interest - Cash Preferred Dividend) x 100.
The DPR is useful because it tells investors what percentage of profits are allocated to shareholders in the form of dividends, and conversely what percentage is ploughed back into the business. From this, all sorts of useful inferences can be made. Equally useful is the DPR over time, because it tells investors whether or not the company is sporting an unsustainable dividend or whether it is the company hording cash.
Before delving into the Untouchable dividend payers, one other interesting side note. For perspective, it's useful to look at the dividend payout ratio of the S&P 500 Index, as a whole, over the last 10 years.
I think this demonstrates two important points. First, note 2008, where the dividend payout ratio climbed to 107%, indicating when the bubble burst, just how much earnings fell, and just how much danger there was to future dividends.