The Dividend Payout Ratio

There is an investing adage that basically states high yield = high risk.  All investors understand this wisdom. But what if you find a high yield stock, and the company has a low PE ratio and a low liabilities to equity ratio? Is the company still a good investment?

One additional measure of a company’s ability to pay its dividends is the Dividend Payout Ratio (DPR). This ratio indicates how much of a company’s revenue goes into paying out its dividend to shareholders. For example a company with a Dividend Payout Ratio of 60%, would pay out 60% of its earnings to shareholders, while retaining 40% of that income.

Dividend Payout RatioDividend Investors focus on the DPR, because it indicates a company’s ability to continue paying dividends, and the likelihood that a company will be able to increase its dividend in the future. Obviously a company with a lower DPR will be able to raise its dividend. The DPR can also help to determine (1) if a company is paying all of its earnings as dividends, (2) leveraging or depleting cash to continue paying its dividends, or (3) leaving extra cash flow for future expansion and operating expense. Investors also focus on the DPR, because a company with a DPR over 100% may not be able to continue to pay its dividends, or may cut the dividend.

Dividend investors like to purchase stocks with a DPR of 60% to 70% 30% to 60% as there is also room in the company for future growth, and possible dividend increases. Big utilities on the other hand often have a higher DPR, because they have no room for future growth. So they payout their cash flow as dividends, and thus have slightly higher dividend yields. The concern is a company which has a high DPR over 100%, must either borrow or deplete cash, to make the difference or cut its dividend to remain competitive.

Recently My Own Advisor discussed the DPR for TransAlta Corp. with a current Dividend Payout Ratio of over 107%. He actually phoned their investor relations department, and asked them flat-out if the dividend was sustainable, or whether they were planning to cut the dividend.

How to Calculate the Dividend Payout Ratio

The DPR is very easy to calculate and you should take it into consideration with the rest of your research. The key figures you need are EPS (earnings per share) and the dollar amount of the Annual Dividend. This information is easily obtainable from the Globe and Mail and many other financial sites.

Dividend Payout Ratio = (Annual Dividend / EPS) * 100

For example, Rogers Communications (RCI.B) has an annual dividend of 1.42 / EPS of 2.64. Therefore the DPR =  53.7%  which is excellent.

Rogers Sugar, a higher yield stock, is 0.34 / 0.63 = 53.9%. This is also an excellent DPR ratio.

On the other hand Yellow Media (YLO) is 0.65 / 0.54 = 120.3%. This is not a good Dividend Payout Ratio, since Yellow Media must leverage an extra .20 cents for every 1.00 in dividends they distribute.

The Financial Blogger provides monthly updated Dividend Yield and Dividend Payout Ratios for the TSX 60 companies, including the Top 10,Top 20 and Top 50. A good resource, with DPR already calculated!

Companies with low DPR and High Yield

Here is a list of my Top 10 Canadian high income and low DPR stocks. My criteria was based on two fundamentals (1) find dividend stocks with a dividend yield over 4%, and (2) a Dividend Payout Ratio (DPR) below 75:

Company Symbol Price Dividend Yield Payout Ratio (DPR)
Coast Wholesale Applicance CWA 4.73 8.9 68.8
Alaris Royalty AD 12.99 7.8 68.9
Le Chateau CTU.A 11.00 6.4 57.9
Rogers Sugar RSI 5.39 6.3 53.9
BCE Inc. BCE 35.33 5.6 72.1
Sun Life Financial Inc. SLF 31.09 4.6 51.6
Bank of Montreal BMO 62.42 4.5 58.7
Telus Corp. T 47.35 4.4 69.5
Rogers Communications RCI.B 34.06 4.2 53.8
CIBC CM 82.57 4.2 58.9

For the record, I am long on Rogers Communications (RCI.B)

21 Responses to “The Dividend Payout Ratio”

  1. Michel

    Mar 10. 2011

    Good article Ninja!
    Thanks for the reference to MOA.I went back and read it. Yes they could cut; they’ve done it before, maybe 10 years ago or so, by half!!! I still own the stock, but I’m watching it. (The growth hasn’t been great either)

  2. The Dividend Ninja

    Mar 10. 2011

    @Michel, thanx for posting, and your feedback on TA as well :)

  3. My Own Advisor

    Mar 10. 2011

    Nice post man.

    My sweet spot is about 70%, but I broke my own rule with TransAlta. We’ll see if it comes back to bite me. Maybe Michel (above) and I will sell at the same time and set off some MASSIVE downward spiral! :)

    Of the companies above, I own almost half of them and I really want to buy T and RCI.B. I’m leaning towards buying PWF tomorrow for the TFSA. I like the yield and I still think RCI.B will dip lower, sub $30.

    What do you think? Should I take RCI.B or PWF?

  4. The Dividend Ninja

    Mar 10. 2011

    @MOA
    I think Telus is a better company than Rogers, but I also think Rogers is better value at the moment. For Rogers, 34 and 30 are the support levels. My hunch is that its bottomed out or very close (but that’s a guess eh?).

    There is obviously a short term market correction starting at the moment, so keep your finger near the buy button for RCI.B. The ex-dividend for Rogers is March 16th.

    I would take RCI.B over PWF any day. PWF has ammassed huge debt with a liabilities-to-equity ratio of over 10. That’s scary!

  5. My Own Advisor

    Mar 10. 2011

    Yes, PWF has debt but they just had HUGE earnings! “Power Financial Corporation reported today operating earnings for the year ended December 31, 2010 of $1,733 million or $2.31 per share, compared with $1,533 million or $2.05 per share in the corresponding period in 2009.”

    Many analysts have been signalling a BUY for this one, for at least a year. GWO and IGM won’t go under.

    What about buying a hundred shares of each? :)

  6. Dividend Mantra

    Mar 11. 2011

    Thanks for the article! I guess I’m a bit more conservative than some of my other dividend growth brethren. I generally try to invest in companies with a DPR of under 50%, unless it’s a high DPR company like a utility or tobacco company with loads of free cash flow. Very interesting read, thanks!

  7. Dividend Mantra

    Mar 11. 2011

    Thanks for the article! I guess I’m a bit more conservative than some of my other dividend growth brethren. I generally try to invest in companies with a DPR of under 50%, unless it’s a high DPR company like a utility or tobacco company with loads of free cash flow. Very interesting read, thanks!

  8. The Dividend Ninja

    Mar 11. 2011

    @Dividend Mantra
    Thanks for Dropping by :) Nothing wrong with being conservative and playing it safe – that’s what Mr. Buffet did, big blue dividend paying stocks with a reasonable yield. While you pay a premium for safety, of course you do sleep well at night.

    PS
    I’ll add you onto my blogroll ;)

  9. Followmy529.com

    Jul 03. 2011

    Nice article Ninja, thank you. I have always thought a better way to determine the dividend payout ratio is via Discounted Cash Flow (DCF). Dividend / DCF. Where DCF = Cash From operations – CapEx. EPS can have funny accounting tricks. Dividends at the end of the day are paid from cash on hand.

  10. Followmy529.com

    Jul 03. 2011

    Nice article Ninja, thank you. I have always thought a better way to determine the dividend payout ratio is via Discounted Cash Flow (DCF). Dividend / DCF. Where DCF = Cash From operations – CapEx. EPS can have funny accounting tricks. Dividends at the end of the day are paid from cash on hand.

  11. The Dividend Ninja

    Jul 03. 2011

    @Followmy529
    Thanx for dropping by. That’s an interesting point to consider the DCF, rather than the EPS. I’ll have to plug in the numbers and compare the results. Interesting ;)However some companies are rich in cash but still have low earnings and pay high dividends. That would be one issue I see with using cash flow of any type as a measure as opposed to EPS.

    PS
    I published a more in-depth article on the DPR in the July 2011 issue of Canadian MoneySaver. I’ll be posting that article after July 15th.

  12. john

    Aug 09. 2011

    I read your article on DPR in Canadian Moneysaver magazine and was led to your website. I enjoyed it and will spend some time on your site. I have been thinking about buying Transalta for the their dividends and was alarmed when you stated their EPS were $0.99. Google finance and RBC Direct lists TA’s EPS as $1.69. BMO Investorline and Yahoo finance lists $1.41. Analyst estimates for 2011 were $1.24 EPS (from yahoo). Could you recommend to me, what sites you use for your numbers? Also, which EPS do you mean exactly? Thanks so much.
    John

  13. The Dividend Ninja

    Aug 09. 2011

    Hi John,

    Thanx for posting! MY research is only as good as the numbers I have to use. Up until now I have been using the Globe & Mail website for my figures, but I have noticed their numbers don’t always match the other financial sites. All other financial websites such as Google and Yahoo, use the proper EPS (TTM) Trailing Twelve Months, which analysts also use to project forward looking statements etc. I believe the G&M may use current figures, on occasion, instead of TTM which is averaged over the quarter.

    At the time I wrote the article in early July TransAlta did indeed have an EPS of 0.99 as per the G&M, and its dividend payout ratio was over 100%. (I’m usually pretty careful to double-check, but if a mistake was made then let me know). Other sites verified a DPR over 100% as well. Currently the Globe & Mail shows an EPS of 1.60 per share, a dividend of 1.16, resulting in a DPR of 72.5%. Google shows an EPS of 1.69 per share, so all appears to be in line. It looks like TA was profitable over the last quarter, decreasing the DPR.

    http://www.theglobeandmail.com/globe-investor/markets/stocks/summary/?q=TA-T

    One word of warning however, a yield of 6% is pretty high for any company. See this comment from a reader:

    http://www.dividendninja.com/the-dividend-payout-ratio#comment-300

    And this post as well from My Own Advisor blog:

    http://www.myownadvisor.ca/2011/03/08/my-quick-response-from-transalta-investor-relations-2/

    Cheers!

  14. The Dividend Ninja

    Aug 09. 2011

    John, this is an earlier article. I was referring to the MoneySaver article which I posted here:

    http://www.dividendninja.com/the-dividend-payout-ratio-2

    Cheers!

  15. john

    Aug 10. 2011

    Thanks for the quick and informative reply Ninja.
    It was late June that I began watching TranAlta and I believe Google and BMO Investorline were showing EPS greater the Div. Payout as that is a screen I also use when watching stocks. Your and MyOwnAdvisor’s research certainly indicates otherwise though.
    Perhaps what can be learned is that not everything you read on the internet is true :) and that an investor’s due diligence should include using multiple financial websites.

  16. The Dividend Ninja

    Aug 10. 2011

    John, back in June the DPR for TransAlts was most definitely over 100% – several sources indicated that, and even TransAlta confirmed that in the My Own Advisor interview.

    Your absolutely right though, due diligence with multiple sources is definitely a good idea :)

    Cheers

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