If you love income stocks that pay a high dividend yield, then you ought to know about this one important ratio – the dividend payout ratio.
The dividend payout ratio is the percentage of a company’s profit that is paid out as dividends to shareholders. For example, if a company earns one million in profit and pays $500,000 as dividends, then its dividend payout ratio is 50%.
The dividend payout ratio go can also go above 100%. So if a company earns a million and pays out $1.2 million, its ratio is 120% — which essentially means it paid out more than it earned in a given year. In the long run, a dividend payout ratio above 100% is not sustainable.
As an income investor, we want to invest in stocks that can pay a steady or growing dividend — even during a recession. The 2008/9 Global Financial Crisis …