Payout ratio

Payout ratio answers the question the dividend yield doesn't: can the company afford the dividend it's paying? A 40% payout ratio means the company sends $0.40 of every $1.00 of reported earnings to shareholders and retains the rest for reinvestment or buffer. A 100%+ payout ratio means it's paying out more than it's earning — the gap has to come from cash reserves, borrowing, or eventually a dividend cut.

There's no universally "right" payout ratio. Utilities and REITs often operate sustainably in the 60-90% range because their cash flows are stable and regulated. Growth companies often pay 0-20% because they have better uses for the cash internally. A sudden jump in payout ratio — the same dollar dividend divided by shrinking earnings — often precedes a cut.

A free-cash-flow payout ratio (dividend / free cash flow) is often more useful than earnings-based payout because it uses the actual cash the company generated, not an accounting figure that can include non-cash items.