Target Payout Ratio

A stock's dividend payout ratio refers to the percent of earnings being paid out in the form of dividends.

Like...if whatever.com is paying a 40-cent-a-share dividend, and it earned $1.00 a share, then it's payout ratio is 40%.

WDTM? Well, boards don't control stock prices. They do control a flat dollar amount allocated to be paid out in dividends, usually based on deep and solid projections of earnings the next 2-5 years. So a given company might have had earnings of $70 million, then $80 million, then $90 million, and project 10-ish percent increases the next 3-5 years. It sells baseball stuff, and while baseball is dying in America, it's getting popular in China, and Chinese players want American brands. So there's a wide moat around this baseball equipment maker, but it's in a slow, steady, pretty predictable market.

Now it's dividend time, and the board allocates $40 million for dividend payout. If earnings go to $2 a share and $200 million next year on huge Chinese demand, then the Board may have to revisit its target payout ratio of 40%, because now they're only at 20% of earnings being paid out in the form of dividends, and they'll likely get grief from shareholders, i.e. institutional investors who likely own this stock in their balanced growth-and-income portfolios, where they're crying for yield.

So it's a moving target at best, and boards have to be careful. It's always great to increase the dividend, but if they ever have to cut it or get rid of the dividend because earnings are getting hit hard by whatever force, it usually means the board is tossed out, and a new slate is elected by angry shareholders.

Not a way any board wants to strike out.