by CI Staff
With bond yields at record lows, many investors are looking to dividend-paying stocks as a means of generating investment income. When a company starts paying a dividend, the market expects it to maintain the dividend going forward, and the stock price will be punished for any reduction in dividend. A stock with a high dividend yield is not a bargain if it surprises investors with a dividend cut. Therefore, if you are looking to buy a dividend-paying stock, you want to evaluate the safety of the dividend—that is, the likelihood that the company will maintain or increase the dividend going forward. One way to do this is to analyze how much of the company’s earnings are paid out in dividends to shareholders. The payout ratio allows investors to see how much of a company’s earnings is being used to fulfill dividend payments. It measures the amount of net income that is paid out as dividends to common shareholders, expressed as a percentage. The payout ratio calculation is as follows:
Dividends per share ÷ earnings per share
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