The Power of DIVCON™: Reality Shares’ Dividend Rating System
June 14, 2016
DIVCON™ is Reality Shares’ proprietary dividend health rating system that utilizes a forward-looking focus to predict future dividend growth rather than a rear-view mirror look at historical dividend changes. DIVCON forecasts and ranks a company’s ability to increase or decrease their future dividends by evaluating each firm based on seven quantitative factors, seeking to deliver a more accurate picture of a company’s fiscal health and better predict the probability of an increase or decrease in a company’s dividend over the next 12 months.
In contrast, many dividend growth investment strategies only consider historical dividend changes, meaning they are analyzing a past picture of the financial health of a company that could be inconsistent with its future prospects—just because a firm increased its dividend last year doesn’t mean the company will increase it again in the future. Generally, dividends are recognized as one important indicator of a company’s financial health, so the attempt to predict and invest in future dividend growth can be a powerful tool for investors.
The seven DIVCON factors – free cash flows, earnings per share growth, dividends per share, buybacks and repurchases, DPS growth, forecasts, and Bloomberg and ALTMAN Z-score ratings – are weighted, scored and categorized according to their importance. The system ranks each stock in the S&P 500 and assigns a 1 to 5 rating based on its assessment of financial health relative to prospects for future dividend growth. The highest rated or healthiest companies earn the highest DIVCON scores, a rating of DIVCON 5, which means their dividend score is very healthy, indicating a strong likelihood they will increase their dividends in the next 12 months. The least financially stable companies as determined by the analysis are given the lowest DIVCON scores and are rated DIVCON 1 or very risky, indicating a likelihood they could cut their dividends in the near future.
Powered by DIVCON is a unique methodology that offers advisors and investors a forward-looking and systematic way to assess dividend growth probability and use this information to make better informed investment choices. The DIVCON system assesses companies relative to both the risk associated with cutting their dividends as well as the potential for outperformance driven by strong dividend growth prospects. Financial advisors looking for more information on the Reality Shares Powered by DIVCON system can access our white paper by registering here.
Reality Shares offers 3 ETFs that are powered by the DIVCON dividend health rating system. Visit our ETF pages or call (855) 595-0240 to find out more.
Free cash flows: Ratio of levered free cash flow to dividends.Earnings per share growth: Growth in earnings per share over the last 12 months. Buybacks and repurchases: Ratio of last 12 month share repurchases to dividends. DPS growth: Dividend actions (increases or decreases) in the last five years. Forecasts: Consensus analyst estimates for dividend growth in the next 12 months. Bloomberg: A dividend health score developed and maintained by Bloomberg. Altman Z: Credit-strength test that gauges a company’s likelihood of bankruptcy.