In the process of building my dividend portfolio, I came across a new video from CF Lieu on how to identify non-sustainable dividend payout company in the Bursa. It is based on the Dividend Payout Ratio.
The dividend payout ratio is the ratio of the total amount of dividends paid out to shareholders relative to the net income of the company. It is the percentage of earnings paid to shareholders via dividends.Source: https://www.investopedia.com/terms/d/dividendpayoutratio.asp
Dividend Payout Ratio is calculated by dividing Annual Dividend Per Share (DPS) by Earning per share (EPS). Example of Public Bank in year 2021, earning per share is 29.1 and dividend per share is 15.2 and the Dividend Payout Ratio will be 52.2 (15.2/29.1*100).
The dividend payout ratio indicates how much of a company’s net earning is paid out as dividends and dividend yield is the rate of return of cash dividends back to the shareholders.
According to CF, below are the category of dividend payout ratio.
- GOOD: 1% to 35%, typically it is term as “value” stocks, or low P/E ratio. This type of company will retain much of their earning to grow the business
- GREAT: 35% to 55%, usually is the well established blue chip stocks which return part of the earning as dividends to the shareholder and at the same time retain the other part to grow the business
- HIGH: 55% to 75%, it is great for dividend investor for short term only as it leaves not much earnings to expand the business
- VERY HIGH: 75% to 95%, almost all the money declared as dividends, which could indicate the company reached saturation or stagnation stage
- LOSS MAKING: 0% or < 0%, which could indicate loss making company
- UNSUSTAINABLE: 95% to 150%, it means they distribute more money that what they earning, which make it non-sustainable
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