Safe, High-Dividend-Yielding Stocks

You've likely relied on this measure of dividend safety countless times: the earnings payout ratio. The ratio shows the portion of earnings paid out in dividends. If a company earns $1 per share during the year and pays out 50 cents per share, the payout ratio is 50%. This is considered a sustainable payout ratio because it leaves a cushion if earnings fall, and room to grow the dividend if earnings rise. This ratio is deceptively simple. If you look deeper, you'll see some cracks.

Dividends are paid in cash. But earnings are not cash. Earnings are an accounting device. They are the net income that results from matching revenue with expenses in the same period. The actual cash that's received or paid may come later. Earnings can be a useful proxy for cash and the earnings payout ratio is a handy tool for many companies. But the difference between earnings (or net income) and the actual cash that pays your dividend is especially great for most high-yield companies. And that limits the usefulness of the earnings payout ratio.

Source: The Street

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