Our Founder and Managing Partner James Demmert was recently asked to share his thoughts about dividends by US News & World Report. Below please find an excerpt from the article... please click here to read the article in its entirety.
How to Calculate a Dividend Payout Ratio
On the surface, the dividend payout ratio is simple. If a firm earns $1 a share and pays out 50 cents over a year, the ratio is 50%. A lower ratio suggests the firm earns enough to keep up those payments or to raise dividends over time even if earnings are uneven. That can be especially important for investors who need dividend income and want it to grow to offset inflation.
The way to calculate the payout ratio is by dividing a company's total dividends by its net income. For example, if Company ABC reported a net income of $80 million and total dividends of $35 million, its payout ratio would be about 43%, a fair payout ratio.
"A higher payout ratio is a sign of a strong balance sheet, and we find companies with a 35% to 55% payout ratio attractive and a sign of stability," says James Demmert, founder and managing partner at Main Street Research in Sausalito, California.
A payout in this range allows a company to continue to pay shareholders and reinvest in its business while growing its dividend. As a dividend investor, you want to own a stock where the dividend grows overtime. A DPR within this standard range can help maintain dividend increases.
Investors focused on income, may look to more established companies that have a consistent dividend payout history, like the dividend aristocrats. The aristocrats are a group of S&P 500 dividend stocks that have 25 years or more of consistent dividend increases. These popular dividend growth stocks include Coca-Cola Co. (ticker: KO), Procter & Gamble Co. (PG) and AT&T (T), among other well-known names.
"Income-oriented investors should seek companies with payout ratios in excess of 60% to maximize dividend yield over underlying company growth," Demmert explains.
A firm paying out more than it has earned probably cannot keep it up forever. Paying more than 100% of earnings means the firm is borrowing to do so to keep shareholders happy or is drawing on cash it could need for an emergency or other investment. A ratio of more than 100% is acceptable only if earnings had taken a hit from an unusual event that doesn't reflect the firm's overall health, like a lawsuit judgment or acquisition expense, experts say.
THIS IS AN EXCERPT...TO READ THE ARTICLE IN ITS ENTIRETY PLEASE CLICK THE FOLLOWING LINK: https://money.usnews.com/investing/dividends/articles/what-is-a-good-dividend-payout-ratio
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