Evaluating a dividend stock isn’t an easy task. There are so many different metrics and data points you need to look at before you can truly make an educated decision as to whether or not you should invest your hard earned capital. One such metric you should always look at is called the dividend payout ratio.
The dividend payout ratio, be definition, is calculated by taking dividends/net income. Or, in other terms = (yearly dividend per share)/(earnings per share). This gives you a ratio (or percentage if multiply by 100) that can help you determine how much of their profit a company is paying out in dividends to their shareholders.
So what’s acceptable? Well, it varies depending on what you are looking for. If you want to take a little bit of risk and add a growth stock to your portfolio, a lower payout ratio isn’t a big deal. On the other hand, if you want to minimize long term risk and take a value investing approach, you might want stick around the 50% mark.
Personally, I look for companies that fall within the 20-50% range. In my mind, a payout ratio near the 20% end is a little low, but it just means the company is investing their profits in other areas of the business that will allow them to grow revenue, profits and, thus, dividends in the future.
Check out the video below for a more indepth discussion on the dividend payout ratio.
What do you guys think? Is 20-50% a good range?