Investors looking to buy equities with a relatively high dividend yield often look to such a company’s dividend payout ratio when attempting to determine just how safe a yield is over the long-term. A dividend payout ratio is simply the dividend payout divided by the company’s earnings; when earnings are high and the dividend is relatively low, such a dividend might be viewed as safer than one which is higher than a company’s entire earnings for a period.
As a rule of thumb, any company with a dividend payout ratio higher than 100% is often looked to as having a dividend yield which may be unsustainable in the long run for the simple fundamental reason that any company which pays out more than it earns in the form of dividends to shareholders is increasingly likely to eventually need to issue shares or debt to continue to do so - moves which would inherently negatively impact such a company's stock price.
That being said, some companies with dividend payout ratios above 100% could be seen as having a stable yield, for a number of reasons. Taking a look at a company's historical payout ratio would give an investor a general idea of whether or not a current payout ratio higher than 100% is the norm, or if one-time accounting changes or a bad quarter were the reason for a disproportionate drop in earnings. Likewise, taking a look at the direction in which a company's payout ratio is trending should be a focal point for such investors considering companies with higher payout ratios.
Invest wisely, my friends.
