Dividend Payout Ratio
The dividend payout ratio indicates the proportion of earnings paid out as dividends. A lower payout ratio suggests that the company retains enough earnings for growth and future dividend payments, making the dividend more sustainable.
- Example: A company with a payout ratio of 40% is likely to reinvest 60% of its earnings back into the business, supporting future growth and dividend stability.
Dividend Growth Rate
Investors should consider the historical dividend growth rate, which measures how much a company has increased its dividend payments over time. Consistent dividend growth indicates a company’s financial health and commitment to returning value to shareholders.
- Example: A company that has increased its dividend by an average of 5% per year over the past decade demonstrates a strong track record of growing shareholder returns.