Category Archives: Dividend Payout Ratio
Dividend payout is the amount of cash that a firm pays to the shareholders for their stock, distributing, this way, the earnings generated during a certain period of time, usually the fiscal year. Generally, a corporation doesn’t transfer all the earnings to the shareholders, as dividends. Some of the cash is used for investments. The dividend payout ratio is the fraction of the net income that a company pays to the shareholders.
Dividend payout – how you can use it
There are two important ways to use your dividend payout. The shareholder is free to use the cash as he or she pleases. Once a company closes the fiscal year and calculates the earnings (or net income) the shareholders will also receive all the documentation. They will found out how much cash was generated and the exact amount of money they get for their shares. The investors get the cash through checks or through electronic transfer, directly into their bank account. However, there is another course of action for your dividend payout. You have the possibility to leave the money into an account and to use them to buy more shares, increasing your participation to that company (this is call a DRIP). A good example of constant dividend payout comes from Johnson & Johnson, which in the last ten years maintain a range between 35% and 45%.
What dividend payout ratio tells you about a company
The dividend payout ratio is an important number, which tells you a lot about a company. The number is a percent and represents how much of the earnings for a determined period of time reach to the investors. For example, if you invested in a company and the company announces, for that year, a dividend payout ratio of 40%, it means that you will get 40% of the earnings generated by the shares you own. The rest of the earnings, in this case 60%, will remain in the company and will be use for investments. Generally, big, well-established companies tend to return a bigger part of the earnings to the shareholders. Low payout ratio can also lead to future dividend raise. New, emergent companies have very low dividend payout ratio or even zero. However, that is not necessarily a bad thing; it just means that the money is reinvested in the company, generating capital growth. You can read more info on dividend payout ratios and how to calculate it in this article: What is a Dividend Payout Ratio.
How to pick the right investments for your needs
If you are looking for places to invest your money, the dividend payout ratio provides you a lot of information. A high dividend pay ratio tells you that the company returns a big part of the earnings to the investors. This type of companies is suitable for you, if you are looking for high current income. If you are aiming for capital growth and you want to pay lower taxes, then you should invest your money on emergent companies, with low dividend payout ratio. They will bring you nice returns on the long term, and, in the mean while, you pay lower taxes for capital gains.
You can buy dividend-paying stocks from the stock market
For a profitable investment portfolio, a good strategy is to include some dividend paying stocks to it. This type of stock comes with a lot of advantages. You get cash returns quarterly, whether the stocks of the company go up or down. This way, you are protected against the periodic, inherent turmoil of the stock market. Investing your money in solid, dividend-paying companies is the right strategy for long-term investments. The dividends are not guaranteed, but statistics show that most companies raise their dividend payout ratio over time or at least maintain it. Purchasing dividend paying stocks protect your from most of the stock market investing risks.
Dividend payers are solid, well established companies and, on the long term, most of the returns come from dividends. Any investments strategy should focus on those companies.
Dividend payout ratio is very important when you look at any dividend stocks. In fact, this is part of the 5 most important dividend ratios should you look at. This article will explain you what is a dividend payout ratio, how to calculate it and why it is so important.
What is a Dividend Payout Ratio?
Dividend payout ratio is the proportion between dividends per share and earnings per share that a company pays to the shareholders. This percent tells you the amount of cash that a company pays in dividends, to shareholders, from the total earnings. Here’s the Dividend Payout Ratio Formula:
Dividend Payout Ratio = Dividends per Share / Earnings per Share
A short example will help you understand this notion better. If a company that has total earnings of $4 per share, but decides to keep $3 for investments and future growths and to pay dividends of only $1 per share, to the shareholders, you can calculate the dividend payout ratio yourself: 1$/4$=0,25 – that’s a 25% payout ratio.
Different Company Stage – Different Dividend Payout Ratio
Most companies retain, each year, a part of their earnings for investments, and distribute to the shareholders the rest of the money. Small, emergent companies tend to keep a big part of their earnings for growing, and will pay small, or no dividends at all. Such companies will have small dividend payout ratios. Big, well-established companies, on the other hand, pay a bigger part of their earnings to the shareholders, thus they have high dividend payout ratios. The question is: should you invest in companies with high or low payout ratios?Well, the answer is not as simple as you might think and there are a lot of factors you need to consider.
High payout ratios – things you need to know
If you want to invest you money in dividend paying companies, there is one important question: should you place your money in companies that offer high payout ratios or, on the contrary, in companies that limit the amount of dividends they pay to the shareholders?
Well, your first instinct would be to pick the companies that offer you high dividend payment ratios thinking company are sharing most of their profit with the shareholders (read YOU!).
However, that’s not always or not necessarily the best choice. When it comes to investing money, there are a lot of factors you need to take into account. If you invest in a company that usually pays dividends at high payout ratios, you need to wander for how long that company will be able to continue the payments?
A company that has a 100% payout ratio probably won’t succeed to remain competitive. Distributing all the money to the shareholders, as dividends, means that there is no money left for investments, for development, for bringing in new technologies and for keeping the business competitive. So, a very high dividends payout ratio is virtually impossible to be maintained on the long-term. Sooner of later, that company will either go out of business or will have to stop paying dividends all together for a while.
What is the Perfect Dividend Payout Ratio?
The best strategy to invest your money is to select companies that offer you a decent dividend payout ratio, but still keep a part of the money for future growth. Dividend payout ratios between 30 % and 60 % tell you that you are dealing with responsible companies, which are interested in providing good, stable returns to the shareholders and in the same time to maintain a healthy, solid business running. When you look at the best dividend stocks, most companies able to maintain a solid dividend payout throughout several years will rarely exceed 60% in term of dividend payout ratio.
What low payout ratios mean and when to invest in such companies
When a company decides to pay only a small fraction of the earnings to the shareholders, as dividends, it means that the company concentrates on growing. Generally, that’s the case of smaller companies. Buying shares to such companies might be a good idea.
Even if you don’t make cash on the short term, there are great perspectives for the future. There is a direct connection between the dividend payout ratio or a company and the price of the shares. Companies with low dividend payout ratio tend to have cheaper shares, while companies with high dividend payout ratio also have pretty expensive shares.
If you buy cheap shares to a growing company, which doesn’t pay high dividends yet, over time you will enjoy great returns. So, if you are interested in capital gain and long-term investments, don’t ignore dynamic companies, only because they offer you low dividend payout ratios. The best way to build a solid, profitable investments portfolio is to place your money both in well-established, big companies and in small, emergent ones. This way, you’ll enjoy nice dividends from companies with high payout ratios and, in the same time, you have the opportunity of high returns on the long run, with emergent companies.