Investing for Beginners , investing

Payout ratio is a percentage that shows a portion of company’s income distributed as dividends. 

Dividend payout ratio can vary over time but for a mature company it has to show some stability to maintain confidence for investors. Payout ratio may be more unsteady over years if it is stated so on company’s dividend policy. Companies that have high dividend payout ratio (over 70%) usually also have high dividend yield and are called dividend stocks. 

Sometimes dividend payout ratio may be even higher than 100%, but that means company distributes more dividends than earns profit, and it can’t be sustainable over long period. If company doesn’t pay any dividends at all (which means dividend payout ratio is equal to 0%), this may indicate few determinants:

Sometimes dividend payout ratio may be even higher than 100%, but that means company distributes more dividends than earns profit, and it can’t be sustainable over long period. If company doesn’t pay any dividends at all (which means dividend payout ratio is equal to 0%), this may indicate few determinants:

• Company doesn’t have free cash for distribution.
• Company is investing all free cash in growth. 
• Company is accumulating cash for some big investments or acquisitions.
• Company implements stock buyback programs (alternative for dividends).
• Company is working in cyclical business and accumulates cash for downturn.
• Company’s management just wants to feel safe and forgets about shareholders needs.  

If company has financial liabilities it doesn’t mean that it cannot payout dividends. Borrowed funds also might be distributed as dividends as long as it serves for the most effective capital structure.

Dividend payout ratio is not the most important ratio for investors (valuation multiples are more significant) and cannot be interpreted without a context, but for big corporations optimum dividend payout ratio should be 30%-60% depending on sector, growth perspectives and stock buyback programs.