Fundamental Metrics: The Dividend Payout Ratio

Posted on Nov 28 2014 - 6:51am by Sharpe Trade

Here at Sharpe Trade, we will have free, educational series that explores many facets of the capital markets in a systematic way.

For the purposes of this entry, we will be specifically discussing the fundamental analysis of a company and focusing in on dividends, and of such dividends; the dividend payout ratio.

Companies issue dividends to those who own shares in their company, whether the company is public or private, whether the stock is common or preferred shares.  No matter if the company is such, or if stock is voting or non-voting stock.

At times, ones will be lured by a high dividend yield sported by a company.  In other words, they pay $30.00 for a share of stock, that sports an 13% dividend yield, or dividend payment.  

Sounds great.  A 13% dividend paid.

But what is the structure of that dividend, or the cost to the company?  How can you tell if the company can afford such a dividend?  How can you tell if the company will soon be hitting a cash flow problem because of the dividend they are paying?

Well, one metric you could look at is the Dividend Payout Ratio, as we explain the following public video in this series …

 

And again, the cash was used merely to illustrate the point.  Actually, with a dividend, it is a percentage of the earnings of a company, which is just a little bit different than the actual cash flow.  But we wanted to illustrate the basic principle.

The dividend payout ratio has nothing to do with the stock price.  Or we should say, it is not based off of the companies fluctuating stock price.  It is a percentage of the companies earnings.

And at times, companies will attempt to lure investors to purchase their stock with a dividend.  So again, in such situations, it is important to know the dividend payout ratio, rather than be led about by the nose in promises of nothing more than ‘a high dividend yield’.  

Many financial sites will display the dividend payout ratio of a company for you. There is Yahoo Finance and it’s Key Statistics that lists the payout ratio. There is dividend.com that lists this payout ratio as well.  Many such financial sites will list the dividend payout ratio (and to be clear, there is some discussion on ‘of what type of EPS’ should this percentage be calculated).

But the above gives you the general idea.  A general principle from which to work.  

Leave A Response