Four Quadrants for a Better Understanding of Your Portfolio

The Dividend Guy has been very generous. He has provided me an excellent guest post for you over on The Dividend Pig. The post is from a chapter of his new eBook, and is titled:
Four Quadrants for a Better Understanding of Your Portfolio.


It’s a great post with an easy to use analysis that will help you become a better investor. It will help you become more informed about the dividend stocks you purchase. That analysis involves the use of quadrants.

The material comes from Mike’s new eBook, Dividend Growth: Freedom Through Passive Income. In this article, Mike uses quadrants to analyze and compare:  dividend yield, dividend growth, and payout ratios. He shows you how to apply quadrants in comparing these ratios. It’s not overly complex, and when you see the methodology, you will quickly realize how effective of a tool it is to help you initially select quality dividend stocks.

Dividend Yield vs Payout Ratio

From his new eBook, Mike writes:

Quadrants have been used over and over for several purposes. Companies use them to position their products (high end vs., low end, mass consumer vs., niche, etc), we will use them to position your stock. If you hope to live off dividends one day, you need to seek stocks that:

  • Provide a healthy dividend at first
  • Grow their dividend over time
  • Grow their income over time (so they can keep up with their dividend and provide you with capital growth at the same time).

To learn more about how to find these stocks, and apply the technique of quadrants, be sure to check out Mike’s detailed post over on The Dividend Pig:

Four Quadrants for a Better Understanding of Your Portfolio

Thank you Mike!

8 Responses to “Four Quadrants for a Better Understanding of Your Portfolio”

  1. moneycone

    Oct 01. 2012

    Very nice DN! When looking at high yields and high payout ratios, one should also check the type of security in question. REITs for example will have a high payout ratio and a high yield as they are legally required to give back 90% of their revenue back to the investors.

    Something to keep in mind.

  2. The Dividend Ninja

    Oct 01. 2012

    Hey MoneyCone, nice to see you back in the neighbourhood. :)

    REITs, junior oil and gas producers, as well as almost all the previous income trusts here in Canada, don’t base their payout ratios on earnings with EPS. They base their payouts on some form of distributable cash flow (DCF). Therefore these types of stocks need to be compared within their own industry.

    See my previous comment to Andrew:
    http://www.dividendninja.com/dividend-growth-freedom-through-passive-income#comment-6083

    And this post:
    http://www.dividendninja.com/what-happened-to-the-income-trusts-2

    Cheers!

  3. Jamie

    Oct 03. 2012

    I like to buy into index funds. Can I do a quadrants comparison with funds or only stocks?

    • The Dividend Ninja

      Oct 03. 2012

      You could certainly use quadrants to compare any two metrics. But what would you compare for an index fund?

  4. S. B.

    Oct 03. 2012

    Interesting article. While reading, I noticed an interesting comparison. You are plotting yield vs payout ratio, presumably noting that lower payout ratio and higher yield are more desirable provided the other number doesn’t change.

    Thus, a less visual way to look at this might be to compare payout ratio with yield by making a ratio of the two factors. So we could divide payout ratio by yield. Payout ratio = (dividends / earnings), and Yield = (dividends / price). So (payout ratio / yield) = (dividends / earnings) / (dividends / price), which reduces to (price / earnings). In other words, (payout ratio / yield) is our old friend from value investing, the P/E ratio.

  5. The quadrant concept is heavily used in many business analysis. I find it brillant the way it’s applied here to get a visualization.

    @S.B., great insight in converting it to an existing value :)

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