What is a Good Dividend Payout Ratio?

What is a good dividend payout ratio for a company? Is 70% too high? Does a company with a low ratio imply high dividend growth?

Using a concrete example, we’ll answer 3 simple questions to figure out if a company has a good dividend payout ratio that supports a healthy dividend. You can ask the same questions for any dividend company you’re interested in.

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However, a payout ratio based on earnings may not be appropriate for companies with big depreciation. Cash flows instead of earnings are better used in such cases, including for REITs and MLPs.

What is the payout ratio?

The payout ratio is the percentage of earnings that are paid out to shareholders as dividends.

For example, Fortis Inc’s  (TSX:FTS) is expected to pay out $1.525 per share of dividends in 2016. The company just hiked its Q4 dividend to $0.40 per share.

  • Fortis’s originally quarterly dividend per share was $0.375.
  • $0.375 * 3 + $0.40 * 1 = $1.525

Its earnings per share are estimated to be $2.17 in 2016. So, Fortis’s payout ratio is about 70%.

  • Annual dividend per share / Earnings per share
  • $1.525 / $2.17 = 0.7028

So, Fortis retained about 30% of its earnings to grow its business or repay its debt, etc.

A lower payout ratio implies a safer dividend than a higher ratio. Read More

The Dividend Aristocrats In Focus

This is a guest contribution by Ben Reynolds of Sure Dividend.  Sure Dividend uses The 8 Rules of Dividend Investing to find high quality dividend growth stocks trading at fair or better prices.

There are very few investment approaches that have historically outperformed the market with lower volatility.

The Dividend Aristocrats Index has returned 10.7% a year on average over the last decade.  The S&P 500 has returned 7.5% a year over the same period.  That equates to an outperformance of 3.2% a year.

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If markets were truly efficient, higher return strategies would be accompanied with higher risk – as measured by return standard deviation.  The Dividend Aristocrats Index has outperformed with lower return standard deviation.  Over the last decade, the Dividend Aristocrats Index has an annualized standard deviation of 14.1% versus 15.3% for the S&P 500.

The performance of the Dividend Aristocrats Index over the last decade has been nothing short of exceptional.  To understand the reason why the index has performed so well, we will examine the Dividend Aristocrats Index in detail.

Dividend Aristocrats Index Examined

To be a Dividend Aristocrat, a stock must meet the following characteristics:

  • Be in the S&P 500 Index
  • Have 25+ years of consecutive dividend increases
  • Meet certain minimum size and liquidity requirements (rarely relevant)

Read More

5 Ways to Reduce Debt

It’s not difficult to reduce your debt. It’s a matter of getting into a habit to always spend less than you make. So that eventually, not only are you reducing your debt, but you’ll also be saving for your future.

Where do you spend your money?

Before you can reduce your debt, you need to know where you’re spending your money. Keep track of your spending and categorize them into Food, Recurring Bills, Entertainment, and so on. Most importantly, add in a column for “needs or wants”.

You can reduce or even eliminate items marked as wants if you’re pressed on reducing your debt.

Forbes conveniently created a list of apps to help you track your spending.

Here are more tips on how to reduce your monthly spending.

Set financial goals

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Where do you want to be 30 years from now? Let’s say your goal is to reach $1,000,000 in 30 years. The earlier you start saving and investing, the easier it is to reach that goal. However, debt will slow down your progress because you have to pay interest.

So, the faster you repay your debt, the sooner you get to save and invest. It only makes sense to let your debt accumulate if you can guarantee higher returns from your investments.

For example, if you can earn 10% on your investments, you can repay your debt that costs you a 5% interest at a lower pace. In this case, you’d be using leverage to grow your assets.

However, whether to use debt to invest really depends on whether you sleep well with the debt that you have and how sure you are of generating high enough returns from your investments. Read More