Payout Ratio

All about dividend safety.

OldeWorldeCompany earned 3 bucks a share this year and has committed to pay a $2 dividend. Its payout ratio is 2/3. Why does this matter? Well, if a company commits to paying a dividend, that's usually an ongoing thing. Like...companies almost never lower their divvys unless life has really broken bad. So when there is cushion above where their dividend is, up to where their earnings are, well then that's a good thing for dividend receivers. That is, they sleep well at night, knowing that the commit for their divvy to be paid has cushion and is relatively secure.

Earnings are volatile for many companies. GE famously puked as their equity traded down from the $50s to well, quite a bit less. And they cut their dividend, as the payout ratio would have far exceeded their earnings.

Hopefully some day, our prince will come again in the form of a nice, fat, healthy cash dividend. Snow White, sing it.