Payout ratio is simply Dividend Per Share (DPS) divided by Earnings Per Share (EPS), which tells you how much buffer does the company have for it to increase its dividends. E.g. EPS for Singtel is about 22c and DPS is 11c on average for the last few years, so the payout ratio is 50%.
But what is a good payout ratio?
If the payout ratio is 30-40%, which I would say is probably below the global average, then you know the company has some room to increase dividends.
If the payout ratio is close to 100%, ie the company is paying everything that it earned as dividends, then we cannot expect a lot of growth in dividends unless earnings is going to grow significantly.
In Singapore, sadly, a lot of high dividend stocks also have very high payout ratio, ie no further room for dividend to grow unless earnings can grow. But if earnings can grow, then the firm would want the money to invest in growth and not return them to shareholders. Hence high dividend plus strong growth is an oxymoron. These stocks don’t exist. Or they are very rare.
When dividend and payout ratio both gets too high, dividend cut becomes inevitable. Read more...