Money

The No. 1 Payout Ratio

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State of the Market

In this week’s episode of State of the Market, Chief Income Strategist Marc Lichtenfeld breaks down the mechanics of one of his favorite metrics…

The good ol’ reliable payout ratio, which Marc uses on a near-daily basis to vet the health of companies and their ability to sustain their dividends.

As a refresher, a payout ratio is the percentage of a company’s profits that it pays out in dividends. Marc generally likes to see payout ratios below 75%.

But this isn’t your standard payout ratio…

Marc calculates payout ratios differently from most investors…

Rather than use earnings, which factor in noncash numbers, like depreciation, Marc calculates payout ratios using cash flow – the total sum of cash moving in and out of a business.

Marc does this because dividends are paid in cash – and we want to ensure that our dividend payers have the cash flow to meet their obligations to shareholders.

In this week’s video, Marc explains why using cash flow to calculate payout ratio is a must for any dividend investor who wants an accurate picture of their dividend’s safety.

Make sure your payout ratios steer you toward winners and away from losers – not the other way around.

Click here to watch this week’s episode.

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