Dividend Payout Ratio (DPR)

300px Pennies Dividend Payout Ratio (DPR)

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Are you looking for a Dividend Payout Ratio calculator? Use our Dividend Payout Ratio Calculator! You can input a stock ticker symbol, or type the values in manually to calculate the DPR.

The DPR Acronym

A Dividend Payout Ratio (DPR) is a ratio that tells you how much money a company is paying out in dividends versus their earnings per share (EPS).  Mathematically it looks like: (Dividends Per Share)/(Earnings Per Share).

Very simply, if a company had an EPS of $2.00 and their annual dividend is $1.50, then their Dividend Payout Ratio (DPR) is $1.50/$2.00 which is .75 or 75%.  This essentially means that 75% of this companies earnings is going towards paying a dividend, and not going towards paying off debt, increasing cash positions, or being used for new innovations.  If that sounds like an awfully big percentage, then you’re right!

When Is A High DPR Too High?

Some people have certain thresholds that they use to filter out companies in this situation.  A lot of people use 80%, but we have seen many that use 60%.  We are a bigger fan of 60% because 80% just seems to leave too little room for error.

So, Why Is DPR Important?

Besides telling you the percentage of their earning that is being handed out, it also tells you how sustainable their dividend is.  In other words: how likely it is that you will continue getting that dividend.  When a companies DPR exceeds 80%, one of three things will eventually happen:

  • The company will cut the dividend
  • The company will manage to increase earnings and leave the dividend where it is at (which decreases DPR).
  • The company will increase earnings, and, if they are masochists, increase the dividend thus continuing the game of chicken.

If they choose the third option, then there is a good chance that the company will continue going through that list of options until they finally end up doing number one, or number two on that list.

We believe that 80% is far too high of a DPR to remain competitive, and that makes it unsustainable.  The one exception being REITs (Real Estate Investment Trusts) which are required to payout 90% DPR.

Do You Want Consistent Dividends?

Our main point with all of the wordiness is above is that the DPR can indicate to you whether you will receive a consistent and dependable dividend.  If you are looking for reliable passive income then look for a more modest DPR or you will find little press releases each quarter announcing dividend cuts, or all out suspension of dividends, and that is not what you want!

The DPR is a great weapon to keep in your passive income arsenal, and if you apply it right away, then you can filter out a large number of companies that you otherwise might have looked at.  This will save you both time, and the frustration of finding out that your dividend have been suspended.

Life is hard enough without needing to read every press release that comes out of the companies that you are invested in.  Check the DPR, better yet if you can, use filters so you don’t even have to look at companies that are paying out unsustainable dividends!

Updates:

Comments

  1. says

    Very educational post! I don’t think I could rely on dividends from a company with a DPR of 70. I generally am ok even with 50 percent (depending on the company) because chances are, the dividends will only increase. However, maybe I should reconsider and move more toward 60…

  2. Mark says

    Excellent article, Tim. Wanted to shout out and say hello. I was looking for more info on DPRs when I came across your link in Google and it was more than enough. Very clear and concise.

    As a result, I checked out the DPR for two of my holdings to compare. One is an REIT like you said, required to payout 90 percent and its’ been paying out almost 94 percent the past 4 quarters.

    The other one is a water utility company which has been paying out around 80 percent. This one got me curious because it has been paying consecutive dividends for over 100 years and been raising dividends for the past 14 years.

    Surprisingly enough, even with the dividend hikes, it is still maintaining an 80 percent DPR. I have to wonder if that’s a normal strategy. I am comfortable with that range for this pick but not so many others because I want some room for my dividends to run.

    Great post and thanks again.

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