Payout Ratio: important word for the democratic investor’s dictionary. March 10, 2006Posted by deminvest in dictionary for democratic investors, Dogs of the Dow, investment, Social investing, stocks.
We, the people, like very much dividends. But we only like dividends that continue to grow in the future. Payout Ratio can help you figure out what may happen to dividends in the future.It is not a smart move to buy a stock because it gives out a 4% dividend yield and then lose 30% stock value because the company declares it cannot afford to continue paying such dividends. There comes our friend the Payout Ratio. Payout Ratio tells you what percentage of company earnings are given to stockholders as dividend. Let’s see an example of how important payout ratio may be comparing two giants, one healthy and one ill:Intel offers dividend yield of 2% and Payout Ratio 23%. Meaning that for every dollar they pay to you as dividend, they put 3 dollars in their bank account
GM offers a dividend yield of 4.9%, but cannot even exhibit a Payout ratio, because they don’t have earnings. They only have losses. What happens is that they borrow money with their junk bonds to pay your dividend this year. For next year… Who knows?