What Is a Dividend Payout Ratio? (2024)

FAQs

What Is a Dividend Payout Ratio? ›

The dividend payout ratio is the total amount of dividends that a company pays to shareholders relative to its net income. Put simply, this ratio is the percentage of earnings paid to shareholders via dividends.

So, what counts as a “good” dividend payout ratio? Generally speaking, a dividend payout ratio of 30-50% is considered healthy, while anything over 50% could be unsustainable.

A company that is likely to distribute roughly half of its earnings as dividends means that the company is well established and a leader in its industry. It's also reinvesting half of its earnings for growth, which is welcome. A company typically raises money from 2 sources: debt and equity.

Dividend payout ratio refers to a financial metric that measures the percentage of a company's earnings paid out to shareholders as dividend. This ratio is calculated by dividing the total amount of dividends paid by the company by its net income for a given period.

What Is a Good Dividend Yield? Yields from 2% to 6% are generally considered to be a good dividend yield, but there are plenty of factors to consider when deciding if a stock's yield makes it a good investment. Your own investment goals should also play a big role in deciding what a good dividend yield is for you.

Dividend Data

Apple Inc.'s ( AAPL ) dividend yield is 0.45%, which means that for every $100 invested in the company's stock, investors would receive $0.45 in dividends per year. Apple Inc.'s payout ratio is 14.9% which means that 14.9% of the company's earnings are paid out as dividends.

The dividend payout ratio is 0% for companies that do not pay dividends and 100% for companies that pay out their entire net income as dividends.

Typically, a REIT with a payout ratio between 35% and 60% is considered ideal and safe from dividend cuts, while ratios between 60% and 75% are moderately safe, and payout ratios above 75% are considered unsafe. As a payout ratio approaches 100% of earnings, it generally portends a high risk for a dividend cut.

A low dividend payout is when a company keeps the majority of its profits and reinvests it in the business and then gives out the rest as dividends. For example, if a company reinvests 60% of its profits back into the business and then pays out the rest in dividends, it has a dividend payout of 40%.

A constant dividend payout ratio policy is a dividend policy in which the percentage of earnings paid in the form of dividends is held constant. In other words, a constant dividend payout ratio policy maintains the same proportion of earnings paid out as dividends to shareholders.

What is a good dividend cover? ›

Generally speaking, a DCR of 2 is viewed as good, as this indicates that a company has the capacity to pay its dividends twice over. A DCR of below 1.5 is viewed as a possible concern, signalling the use of loans.

Companies that retain all their income have a dividend payout ratio of 0% and a retention ratio of 100%. Companies that distribute all their income to shareholders would have a dividend payout ratio of 100%, and a retention ratio of 0%.

The dividend payout ratio is directly related to the valuation of the company. In fact, the ratio can affect stock valuation by offering insights into a company's growth potential, dividend policy, and overall financial health.

A 40% payout ratio would be favorable for an investor because a payout ratio below 50% gives a company enough flexibility to reward shareholders while reinvesting in new projects. Some profitable companies, such as Alphabet Inc.

With questions about the U.S. economy mounting, here are three high-yield dividend stocks that investors can buy and hold forever: Ford Motor Company (NYSE: F), AT&T (NYSE: T), and Kraft Heinz (NASDAQ: KHC).

For example, a payout rate of 30% is good for a company in a more growth-focused industry like tech, where retaining profits for R&D is crucial.

Generally speaking, a DCR of 2 is viewed as good, as this indicates that a company has the capacity to pay its dividends twice over. A DCR of below 1.5 is viewed as a possible concern, signalling the use of loans.

Further, Veritas explains that the payout ratio is much higher as BCE excludes capital leases while calculating its free cash flows. Capital leases are not optional costs and are required to purchase and maintain critical assets, including cell towers and satellites.