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Dividend Payout Ratio Extremely Important!
A significant indicator of a dividend stock’s performance is the dividend payout ratio.
The payout ratio is defined as the dividend payout divided by the earnings per share (or net income).
In his book The Little Book of Big Dividends: A Safe Formula for Guaranteed Returns (Little Books. Big Profits)Investing Books), Charles Carlson identifies 10 factors that go in to his BSD (Big Safe Dividend) formula. Payout ratio is NUMBER 1 in that formula and contributes the most to selection of the top dividend stocks with a 30% weighting in his formula. In fact he says “The payout ratio is the single most powerful factor in analyzing the health, stability, and growth potential of a stock’s dividend.”
Why is it so important? Because it tells you how well earnings support the dividend payments. A company that has a 40% payout ratio means that the company is only paying 40% of its income to investors as dividends. This indicates that there is more room for future dividend growth. A company with a payout ratio above 60% is in less of a position to increase its dividends without income growth. Payout ratios in excess of 100% is an indicator of a company that has an unsustainable dividend distribution. It is telling you that they are paying more in dividends than they have as income.
As a dividend investor you should be looking for stocks that have a dividend payout ratio less than 60%. This allows a good portion of the profits to be paid to the shareholder as well as allowing for some of the profits to be invested back into the company to create more internal growth. Higher the payout ratios means less profits are invested back into the business to create future growth. We want to invest in companies that invest back into the business in order to create more growth that will allow for another increase in the dividend.
, Charles Carlson identifies 10 factors that go in to his BSD (Big Safe Dividend) formula. Payout ratio is NUMBER 1 in that formula and contributes the most to selection of the top dividend stocks with a 30% weighting in his formula. In fact he says “The payout ratio is the single most powerful factor in analyzing the health, stability, and growth potential of a stock’s dividend.” 
