Tuesday, April 17, 2012

RRR - Risk Reward Ratio

With a good bit of student loan debt paid off, the dividend investment portfolio now has room for a good purchase.  I plan on purchasing AFL, and just by chance a fellow blogger named PullingOurselvesUp just made a great post about Aflac.

With the millions of factors going into a stock purchase, I like to look at the RRR.  I call this the risk reward ratio, which is a simple way to compare the risks and rewards that stocks provide.  My ideal stock pays huge dividends with very low payouts.  Here is a quick glimpse into how the RRR works, and how AFL stacks up against a few dividend champions.

The RRR is simply the Yield/Payout (there are other names for it im sure).  The idea is if the yield goes up, and the overall payout goes down, the RRR value goes up.  AFL is currently very under-valued, which helps the yield % and also leaves room for great stock-price hikes when the market corrects itself!

Like AFL, MCY is also an insurance company.  Both companies have similar stock prices, but MCY pays almost twice as much dividends, with twice the payout amount.  I think there is more long-term potential for AFL since it pushes harder for earnings while maintaining the low payout.  Since MCY focuses on automobile insurance, while AFL focuses on supplemental insurance, owning both would be a possibility if someone couldn't make up their mind between the two =).

Disclaimer: I am not a financial planner, advisor, or accountant. The financial actions mentioned were only suited for my own risk tolerance, strategy, and ideas. Copying another's financial moves can lead to large losses. Each person needs to do their due diligence in researching and planning their own actions in the financial markets.


  1. Interesting. I had not thought about doing the two in a ratio. This wouldn't work for REITs or BDCs because of their tax laws but for everything else it could do well as a quick metric.

    1. This metric has been pretty helpful so far. A few non-reit, non-utility dividend champions have payout ratios of 75+% and that bothers me. I love high-yielding stocks, but at the same time consistency and room for raises is attractive too.