What Is an Expected Dividend Payout Ratio?
There are many ways to invest in stocks, and one of them is to focus on dividends. Dividends are attractive for many reasons, but some investors enjoy receiving a regular cash payment for holding shares in a stock. To get an idea of how much to expect in dividend payments, investors look at the expected dividend payout ratio. The expected dividend payout ratio also gives investors an idea of how safe or risky their dividend is.
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Dividend
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A dividend is a payment, usually consisting of cash, made by a company to shareholders. There are two kinds of dividends: regular and special. Regular dividends are cash payments made on a certain time schedule. The payments are made usually either monthly, quarterly, semi-annually or annually. Special dividends are one-time dividends a company pays to its shareholders after a cash windfall. Some investors look for stocks that pay regular dividends as they want to earn a return while holding a stock. It also is important for those investors who count on using the dividend payments for everyday purchases.
Dividend Payout Ratio
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The dividend payout ratio is calculated by dividing the dividend by the net income. For example, a company declared $1 million of dividends last year and it earned $3 million. To find the dividend payout ratio for last year, you divide $1 million by $3 million for a dividend payout ratio of 33 percent.
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Expected Dividend Payout Ratio
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The expected dividend payout ratio is what investors and analysts expect a company to pay out in dividends in the future. Companies that pay dividends usually set a target dividend payout ratio that gives an idea to investors of the kind of dividends to expect in the future. Keep in mind that if earnings of a company decrease and the company focuses on paying out a target dividend payout ratio, the dividends of the company may also decrease to shareholders.
Cash Impact
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One issue with the dividend payout ratio is that a dividend is paid out of cash not accounting earnings. So therefore, it is possible to have a dividend payout ratio of more than 100 percent. It is also possible that a company may have trouble paying a dividend even if it had a year with strong earnings. If the cash flow did not match the earnings, the company may want to save the cash and not put extra stress on its finances to satisfy shareholders.
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References
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