When you receive dividends from a dividend producing company, one of the many equations to consider is the payout ratio. The payout ratio is how much of the company’s earnings are being paid out in dividends. In an ideal world – 50%, but for companies that have their earnings regulated similar to utility and pipeline companies – 80% is good. As a dividend buyer you believe one of the best things a company can do with its money is give money (dividend) to its owners or shareholders..

When you look at the payout ratio one of the the first questions will be is the ratio sustainable? will it continue for a long period of time or at least as long as you are intending to own the shares? There is never a perfect answer, except in retrospective. The company could have lower earnings for a year, the ratio goes up, is that bad? will it change the following year? what can management do to decrease the level? and a host of other questions that will need to be answered. If the payout ratio is sustainable, then as long as you know how the company makes its money, you have little worry and you can move to other ratios and enjoy the dividend.

There are more questions than answers, till the next time – to raising questions.