Investing: Understanding the "payout ratio"

Be Smart About High-Dividend Stocks

Excerpt:

In general, a payout ratio higher than 100% means that over the long term, it's unlikely that the company will be able to sustain current dividend levels without extraordinary growth.

The payout ratio is also a useful tool for comparing companies in the same industry. For instance, both Washington Mutual and Wells Fargo have suffered losses from the ongoing mortgage crisis. Yet while Washington Mutual's large dividend seems unsustainable, Wells Fargo's more modest payout isn't straining the company's finances as of yet.

If you're just getting started, high-dividend stocks can be a great way to introduce yourself to stock investing. Just make sure you do your homework before you buy, and you can help yourself avoid the nasty surprise of a dividend cut.

Comment: Wells Fargo's payout ratio is 46%. How to calculate: WFC. Divide the dividend into the EPS (Earnings per Share). In the case of Wells Fargo it is: 1.24/2.64 = 46%