Dividend Growth !

“Don’t worry about price fluctuations. All that matters is that the dividend flow is secure and uninterrupted.”

All dividend analysts will follow this by reviewing historical data on dividend paying stocks, ensuring that companies have a consistent record of paying regular dividends, as well as a history of increasing dividends over time. I like this approach which is extremely useful, however I prefer to take things a few steps further. I do this via “cash flow analysis” of the past, as well as present trends.

To grow a business, and dividends, companies require strong cash flows. A business cannot grow dividends without growing the underlying business. Therefore, the business MUST retain sufficient cash to expand operations. Three unique numbers come into play as a result as follows:

a) Net Income
b) Depreciation and Amortization
b) Capital Expenditures

a) Net Income- This is a straightforward calculation of Revenue minus expenses, resulting in the ever popular “earnings per share” (EPS).

b) Depreciation and Amortization - This expense category of is a non cash expense. Companies depreciate assets much like the car you recently purchased. Over time, the assets a company collects lose their vale. The accountants call this depreciation, which really means the assets are “used” and getting older over time. They deduct an amount every year from the revenues to reflect this depreciation, however the company does not disburse any cash for this accounting entry. It is simply that………… an accounting entry or “non cash expense”.

Capital Expenditures - another fancy term in accounting parlance to explain new assets a company must purchase to either replace the used stuff, or keep up with new technologies. In simple terms, when your car gets old, you buy a new one. The catch is that most people don’t factor in depreciation every year as the car grows old. All of a sudden in year 5 or 6, a large disbursement is required for a new car. In the accounting world, this is a capital expenditure. Capital expenditures are cash disbursements and they can be VERY BIG in certain companies.

I determine cash flow as follows:
Net Income + Depreciation and Amortization - Capital Expenditures = Cash Flow.

Note that this is MY interpretation of cash flow and not necessarily the accountants version.

More on this topic at The Dividend Post as http://www.vmwinc.com/DP/dividendpostinvestmentmethodology.htm