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Low Dividend Payout: Friend or Foe?

by Stuart Chaussee

Before buying any dividend-paying stock, I always check the dividend payout ratio. This simple ratio, which tells you the percentage of earnings being used to pay the company's dividend, can tell you much about the company's management, whether or not the dividend is at risk, and what kind of dividend growth you can expect in the future. I like to buy stocks with a low dividend payout ratio (50% or below) for several reasons: The dividend is not at risk; There is a high likelihood of dividend increases in coming years; and The company should be in a better position to withstand any short-term business downturn without having to resort to a dividend cut (cardinal sin). Still, if you make a watch list composed of low dividend-payout companies, you'll have to ask yourself if the company is being too miserly by not paying you...

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