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The Secret To Becoming A Great Dividend-Earner

May 8, 2012 by  

The Secret To Becoming A Great Dividend-Earner
PHOTOS.COM
The payout ratio is the percentage of a company's earnings used to pay its dividend.

When I sit down to select dividend-paying stocks for my readers, my personal portfolio, and my mother’s portfolio, I don’t just consider the “usual” numbers.

Of course, I look at important things like brand quality, profit margins and sales growth.

But I also use a little-known, very powerful concept called the “payout ratio” to guide my decisions.

The payout ratio is the percentage of a company’s earnings used to pay its dividend. My rough rule of thumb is to stick with companies with a payout ratio of less than 60 percent.

You see, a company with a high payout ratio—one that pays out around 75 percent of its earnings as dividends—may struggle to maintain its dividend if it hits a rough patch or if the economy weakens.

Utility companies tend to have higher payout ratios. Often, it’s because they are mature companies with less room for growth. But even in this industry I stay away from super-high payout ratios. They don’t provide a “cushion” for tough times.

However, 60 percent is a great middle-of-the-road number for investors interested in a safe payout AND some future growth.

You see, if a company has a payout ratio of less than 60 percent, it’s plowing 40 percent or more of the earnings back into the business, investing in its own growth. (A 2008 study showed 60 percent of the companies with a payout ratio of 60 percent or less raised their dividends down the road.)

To compute a company’s payout ratio, I divide the annual dividends per share by the annual earnings per share. I find both numbers in the company’s annual report. (For an even faster check, Yahoo Finance lists the payout ratio on its “key statistics” page.)

Here are a few of my favorite dividend-payers and their payout ratios:

Company Payout Ratio
McDonald’s 48%
Microsoft 26%
3M 37%
ExxonMobil 22%
As you can see, each company has a payout ratio well below 60 percent. They have plenty of money to both pay dividends and invest in their businesses. And earnings could theoretically fall in half before they’d have to think about cutting their dividends.
Even better, these are all companies that will grow earnings in good times and bad. And with their super-safe payout ratios, they’ll pass on that growth to you no matter what.
Here’s to our health, wealth and a great retirement,

-Dr. David Eifrig,

Editor, Retirement Millionaire

P.S. In addition to these kinds of common sense investment tips, I’ve compiled a handful of safe investments you can make right now… all of which pay a high yield. Many retirees are using these investments to get all the income they need for the rest of their lives. I think you’ll be surprised at what these investments are… and how simple they are to use. You can learn about them right here.

Dr. David Eifrig Jr.

is the editor of two of Stansberry's best advisory services. One of his advisories, Retirement Millionaire, is a monthly letter showing readers how to live a millionaire lifestyle on less than you'd imagine possible. He travels around the U.S. looking for bargains, deals and great investment ideas. Already his average reader has saved $2,793 since 2008 (documented in each Retirement Millionaire issue). He also writes Retirement Trader, a bi-monthly advisory that explains simple techniques to make large, but very safe, gains in the stock and bond markets. This is a pure finance play and the reason Porter Stansberry loves having "Doc" on the team. Doc holds an MBA from Kellogg and has worked in arbitrage and trading groups with major Wall Street investment banks (Goldman Sachs). In 1995, he retired from the "Street," went to UNC-Chapel Hill for medical school and became an ophthalmologist. Now, in his latest "retirement," he joined Stansberry & Associates full-time to share with readers his experiences and ideas.

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  • Sirian

    This is all fine and dandy but what type of payout ratio will there be once the dollar collapses? Nevermind, the answer should be obvious.

    • Tom W.

      It is Sirian. PAINFULLY!!!

      • GALT

        Hell, even if DOOM doesn’t occur ( and it won’t ) any analysis would make this laughable,
        when one includes taxation, plus inflation…….but this is a bait and switch…….

  • http://blog.dynamiclifeenterprises.com/ Jim

    Dividend paying companies versus Private Real Estate Investment Trusts (PREIT)
    PREITs invested in multi-unit residential properties are a great alternative for investors seeking higher yield with greater security:
    ~ 90% Profits distributed as dividends
    ~ Good tax treatment; no corporate tax
    ~ No correlation to stock, bond or commodity markets, therefore less volitility
    ~ Liquidity

  • Tom W.

    “Lay not up for yourselves treasures upon earth, where moth and rust doth corrupt, and where thieves break through and steal: But lay up for yourselves treasures in heaven, where neither moth nor rust doth corrupt, and where thieves do not break through nor steal: For where your treasure is, there will your heart be also.” – Matt. 6:19-21 (KJV)

    “Go to now, ye rich men, weep and howl for your miseries that shall come upon you. Your riches are corrupted, and your garments are motheaten. Your gold and silver is cankered; and the rust of them shall be a witness against you, and shall eat your flesh as it were fire. Ye have heaped treasure together for the last days. Behold, the hire of the labourers who have reaped down your fields, which is of you kept back by fraud, crieth: and the cries of them which have reaped are entered into the ears of the Lord of sabaoth. Ye have lived in pleasure on the earth, and been wanton; ye have nourished your hearts, as in a day of slaughter. Ye have condemned and killed the just; and he doth not resist you. Be patient therefore, brethren, unto the coming of the Lord. Behold, the husbandman waiteth for the precious fruit of the earth, and hath long patience for it, until he receive the early and latter rain. Be ye also patient; stablish your hearts: for the coming of the Lord draweth nigh.” – James 5:1-8 (KJV)

    Some of ya JUST DON’T GET IT, do ya?!! There is only ONE way to be ready for what is FAST approachin’!!! He stands at the door and knocks, won’t you let Him in?! Do you know Him as your personal Lord and Savior?!! If not would ya like to? It’s as easy as simply bowing your head right where you’re at and sincerely praying this prayer;
    Lord, I believe that Jesus is the Son of God. I believe that He came and died to pay the penalty for the sins that I have committed. I ask You to forgive me, and to give me the gift of eternal life You promised. Come into my life, and cause me to be born again. Amen.
    If you prayed that prayer and meant it with your entire heart, know that He did come into your heart and now you’re ready for whatever this ole’ world has to throw at ya!!! Hallelujah!
    “This know also, that in the last days perilous times shall come. For men shall be lovers of their own selves, covetous, boasters, proud, blasphemers, disobedient to parents, unthankful, unholy, Without natural affection, trucebreakers, false accusers, incontinent, fierce, despisers of those that are good, Traitors, heady, highminded, lovers of pleasure more than lovers of God; Having a form of godliness, but denying the power thereof: from such turn away.” – II Tim. 3:1-5 (KJV)
    Folks, I challange you to find a better description of the human race today ANYWHERE!!!
    Luke 21:28 (KJV)
    “And when these things begin to come to pass, then look up, and lift up your heads; for your redemption draweth nigh.”

    • Kevin

      I guess I should sell all my stocks, bonds and property, give it all to charity, and go on welfare so you can take care of me then, huh! Fool!

    • Kay

      Tom,
      I agree that the remedy for the evil in men’s hearts is salvation. And I know you mean well when you are trying to tell people how to have salvation, but please be careful, telling people to pray a prayer will not get them saved, for the most part. Too many people are told, “just pray this prayer and mean it with all your heart.” They do that, and are just as lost after the prayer as they were before. This is usually evidenced by lack of obedience to Christ and lack of fruit in their lives (fruit of the Spirit: love, joy, peace, patience, goodness, kindness, faithfulness, gentleness, self-control. See Galatians 5:19-24 and I John 3.)

      Professing Christians who lack evidence of salvation should examine themselves to see if they are in the faith as commanded by Paul in II Corinthians 13:5. A good way to do this is to read the book of I John compare what John said to your own life.

      Jesus said, “unless you repent, you too will perish.” The missing ingredient in your Gospel presentation is repentance. Jesus said we will perish if we do not repent (turn from sin). And the best way to help that process along is by using the Law to bring the knowledge of sin. (Galatians 3:24, Psalm 19:7)

      Paul preached repentance: “The times of ignorance God overlooked, but now he commands all people everywhere to repent, because he has fixed a day on which he will judge the world in righteousness by the man whom he has appointed; and of this he has given assurance to all by raising him from the dead.” Acts 17:30-31 (ESV)

      Also, faith is required. “Believe in the Lord Jesus, and you will be saved…” Acts 16:31

      On a side note, according to the Bible it is not evil to be rich or to invest one’s money wisely and to reap the benefits of that. However, it is evil to desire to be rich or to hasten after riches. And those who are rich in this world are supposed to be generous with the poor.

      • http://blog.dynamiclifeenterprises.com/ Jim

        Sorry Kay, I haven’t got the hang of these blogs yet. I put my comment for you in the wrong place so I will repeat it here.
        Very well communicated Kay. People need to be led to salvation not beaten into submission. God granted us free will to make both wise and unwise decisions but the choice is ours. Guidance should be offered in love not in anger And this discussion has departed from the original topic and intention.

      • Tom W.

        As trhe Bible says Kay, it;s the LOVE of money that is the ROOT of all evil! I get what you’re sayin’ and are ABSOLUTELY right that faith without works is dead!!! (emphasis ALL mine) As the Lord said Himself, “No man lighteth a candle and put it under a bushel basket or a bed.”. But I must say this Kay, you are right that simply saying the prayer will not SAVE you, for God’s Holy Word says that to come to Him, FIRST you MUST believe! But that being said, the only way to mean it with ALL your heart, is to BELIEVE!!! So if you prayed that prayer with ALL your HEART and opened the door unto the MASTER, then all those other fruits will just naturally start to appear! I understand your point and I pray you understand mine. I usally offer this invitation;

        If the rapture were to happen today, I’d be totally in awe if 75% of church members, not to mention the general population of the United States, would be present at that great meeting in the air. (I Thess. 4:16-18) Do You know what the Olivette Prophecies are? Before entering Jerusalem for the last time, Jesus sat on the Mount of Olives and told the Deciples for the third time what was going to befall Him. They just weren’t getting it. But He told them not to worry because He would come again. When asked what would be the signs of His return, He gave them these prophecies. (Matt. ch.24, Mark ch.13, and Luke ch.21) Luke ch.17 also touches a little on the End-time Prophecies. Along with many other Old and New Testament prophecies. Study them! Know them! Memorize them! Is your lamp trimmed and burning? (Matt. 25:1-13) Because if you’re not looking up, (Luke 21:28) you surely to God must be blind!!! (II Cor. 4:3&4) Jesus is coming everybody!!! I pray that you’re ready! If you’re not, you may pray a prayer similar to this: “Dear God, I know that You love me. I admit that I’m a sinner. Please forgive me for my sins. I place my faith in Jesus as my Savior and Lord. Thank You for saving me. In Jesus’ name I pray. Amen.” If you prayed that prayer and meant it with all your heart, know for a certainty that it is impossible for God to lie! (Rom. 10:13) This is what it means to be born-again! (John 3:3) Go find yourself a church, forget about a perfect one, they don’t exist. Surround yourself with Christian friends, they won’t be perfect either, that’s why we need Jesus! Emmerce yourself in Gods’ Word so you’ll know how to fight off ole’ nick. (Eph. 6:13-18) You’re in the Army now, soldier! And now it’s your job to bring as many lost sheep back into the fold as possible. (Matt. 5:14-16) What?! Did you think it was going to be easy? (II Tim. 3:12) God be with you! I wish for everyone who reads this letter to know that the writer is a certified Jesus nut with plenty of documentation to prove it!

        I will be more careful to make sure that I emphasize works also, although I TRULY believe that as long as you MEAN that prayer when you pray it, once Jesus comes in, HE’S IN!!! You should know as well as I do that when you aren’t doing the things you should, The Holy Ghost won’t give any peace WHAT-SO-EVER! PRAISE BE HALLELUIAH!!! Good lookin’ out Sis!

        • Kay

          Tom W.,

          Woops, I did not place my response to you in the right place. Having the same trouble as Jim, so I am reposting my comment here…

          I realize I am getting off topic, but when someone starts talking about salvation, I often see the need to jump in and make sure salvation is clearly understood. Because we can work hard, invest our money wisely, and do well in this life, but think about how long eternity is going to last! Just want to state, so that people understand, we are not saved by doing good works. I know that you know that, but I just want to clarify that point. If a person is truly saved, if he has truly repented of his sins and trusted in Christ alone for salvation, then the good works will be EVIDENCE of salvation. The good works naturally follow if we are truly saved.

          No amount of good works can make up for all the many times we have broken God’s laws. Who of us have not lied countless times over the course of our lives, or stolen something (regardless of the value of the item), or disobeyed parents? Who can claim they have loved God with all their heart, soul, mind and strength? Who of us can claim to have a perfectly pure heart free of lust (which Jesus said was the same as adultery) or free of hate (which the Bible equates with murder)? We have all broken God’s laws countless times. However, Jesus died on the cross to take the penalty for our sins, and He bore the wrath of God for our sins, although He never once sinned Himself. And He rose from the dead, defeating death. If we will repent of our sins and turn from them, and trust in Christ alone for our salvation, we can be saved from the wrath of God, which is a just wrath because we are guilty of breaking His laws.

          This is a kind offer that God makes to us. May God grant the hearers repentance unto life.

          • Tom W.

            You’re welcome to jump in anytime Kay! As a matterof fact, it’s good to have ya along girlfriend!!! Never forget that there is strenth in numbers, but WE KNOW WHERE OUR TRUE STRENTH LIES, AMEN!!! One of our advesary’s favorite tactics is to get us alone where him and his ravenous demon horde can rip us apart like a pack of Canadian grey wolves!!! And beside that, you make an excellent point! Once you become a child of the King, you can’t help yourself, good works’ll be fallin’ outta yer pockets!!!

            “We din’t do good to be saved, we do good because we are saved.” – Anne Graham Lotz

          • Tom W.

            “For the preaching of the cross is to them that perish foolishness; but unto us which are saved it is the power of God.” – I Cor. 1:18 (KJV)

  • Tom W.

    MODERATE THIS!!!

    • eddie47d

      What’s to moderate for all is true.

  • eddie47d

    Although I do not own any McDonald stocks they have had many stellar years. The profits seem to be poured back into new restaurants yet the investors do fairly well. Too many investors pour money into the darling of the day like Enron and end up losing their shirts. Slow and steady is a better long term goal I just wish I had the money to follow my own advice. LOL! I do own one commercial REIT which made me nervous but I haven’t lost anything on it (yet).

    • http://www.facebook.com/profile.php?id=100003309707389 Tom W.

      HEY EVERYBODY!!! eddie givin’ out FREE investment advice! COME!!! Get yo bad self some!

  • Alex

    The ONLY people who should make money of of their own sweat are WORKERS. No one who sits on a board and determines how best to reap reward whilst cutting safety and environmental concerns, nor the people who own ‘shares’ in an endeavor without contributing labor, should enrich themselves on the backs of the WORKERS.

    • Kevin

      It’s called a free market society, and it’s what makes America great. Do you think there would be a Exxon, Apple or GE, etc. if it weren’t for investors. I bet you own tons of stuff that these type of companies make. Get off your soap box, hypocrite liberal, you people are sooo stupid sometimes.

      • http://www.facebook.com/profile.php?id=100003309707389 Tom W.

        Well you sure come to make friends didn’t ya Scrooge McDuck?!! Investors are nothing more than upscale welfare recipients! THINK ABOUT IT DUMBA$$!!!

      • nc

        Kevin, Go to the site of “Bulls, Bears, Donkeys and Elephants”! Study it carefully and give me your best right wing spin of why that does not reflect well on the past “socialist “Democrats ability to handle our free market society? We “hypocrite” liberals can hardly wait to hear your explanation of how much better the more conservative Hoover, Nixon and Daddy boy bush were for free market system. All Republicans who Presided over losses in the stock market in their administrations! That would be 3 out of the last 7 Republican Presidents with less than enviable records with OUR SYSTEM>
        You ask in a later post if you should sell your stock?FOR HEAVENS SAKE NO DON’T SELL YOU STOCK!! THERE IS A DEMOCRAT IN THE WHITE HOUSE!! STOCKS HAVE MAKE 41% MORE UNDER THE DEMOCRATS THAN THE REPUBLICANS FROM FDR THROUGH DADDY’S BOY BUSH! YOU WILL PROBABLY WANT TO SELL IF ROMNEY WINS, THE REPUBLICAN RECORD WITH STOCKS HAS BEEN QUITE SHI**Y OVER THE YEARS! THE STOCK MARKET LOVES THE DEMOCRATS! SEE HISTORY NOT THE FAUX NOISE KOOL AID.

        QUERY: WHEN EVER A REPUBLICAN TOLD YOU THAT REPUBLICANS WERE BETTER WITH THE FREE MARKET THAN DEMOCRATS, DID THEY EVER GIVE YOU ANY FIGURES TO PROVE IT????OR DID THEY JUST YOU THE DRINK THE KOOL AID AND NOT QUESTION THEIR STATEMENT???WHAT FIGURES DID THEY ACTUALLY GIVE YOU TO PROVE THAT POINT?????????????????THINK BACK???WHY NO FIGURES????

    • eddie47d

      Investors aren’t usually the problem. It’s mostly those Hedge Fund managers and Speculators plus a few companies who cook the books who turn Wall Street into a casino.

    • Rich Armstrong

      Wow! What a small view of the world. People get paid for a number of things; ideas, risking their capital to bring ideas to market, management of the enterprise and the laber to produce a product are just a few. In other words you can be paid for brains as well as brawn. If you look at all the pension plans of the laborers [the programs that will let these people enjoy their retirement], it’s the distribution of the profits of successful companies that makes it happen. That means the electrician, the bus driver, the teacher and the corporate accountant all get a piece of the profit of the oil company. Do you mean they don’t deserve it?

      • http://www.facebook.com/profile.php?id=100003309707389 Tom W.

        No what he’s sayin’ is that one of our problems is that there are too many people in this country makin’ too much damn money and doin’ nothing! We’re gettin’ ready to find out what it takes, and your right, it takes a combination of talents to make it work. But it also takes teamwork!!! This GREAT country was built with the blood, sweat, and tears of the American worker, and now the CEO’s in this country are sending our jobs overseas to exploit the slave labor practices of those countries?!! How much has the average CEO’s salary increased in the last 20 yrs. as opposed to the Minimum wage, percentage wise?! If I would’ve told my dad that in 2012 you would be able to get a job flippin’ burgers at Macky D’s and make more money and bennies than your average construction laborer, he’d have told me that I’d been smokin’ to much of that wacky weed!!! Nepotism is a huge problem in this country, how many GOOD jobs are handed out to reletives instead of some deserving employee?!!
        Well if you’ve been watchin’ the market at all today, it looks as if Europe isn’t goin’ be able to pull out of this catastrophy, so we’ll soon find out who’s right and who’s wrong!!! God be with us!!!

  • http://www.facebook.com/profile.php?id=100003309707389 Tom W.

    Well I guess you be gettin’ ready to find out a$$hole, as it looks like Europe is gettin’ ready to go over the edge!!! Been watchin’ the market today there moneybags?!! It’s still not too late to repent though!!!

  • http://blog.dynamiclifeenterprises.com/ Jim

    Very well communicated Kay. People need to be led to salvation not beaten into submission. God granted us free will to make both wise and unwise decisions but the choice is ours. Guidance should be offered in love not in anger And this discussion has departed from the original topic and intention.

    • Tom W.

      Oh yeah Jim?!! I think that it’s time to get on the roof tops and yell with all our might!!! But I know where that will get you, I’ve been arrested at least a half a dozen times for takin’ the Word where they didn’t want to hear it! I’ve been thrown in the loony-bin on three different occasions by my LOVED ones cause they all thought I’d flipped my wig! I got documentation to prove it!!! I had a childhood friend stick a gun in my face ’cause it BOTHERED him SO bad! I STILL pray for him!!! I see the day FAST approachin’ and accuse you of NOT doing what Christ COMMANDED ALL His deciples to do!!!

      “And he said unto them, Go ye into all the world, and preach the gospel to every creature. He that believeth and is baptized shall be saved; but he that believeth not shall be damned.” – Mark 16:15&16 (KJV)

      ” charge thee therefore before God, and the Lord Jesus Christ, who shall judge the quick and the dead at his appearing and his kingdom; Preach the word; be instant in season, out of season; reprove, rebuke, exhort with all long suffering and doctrine. For the time will come when they will not endure sound doctrine; but after their own lusts shall they heap to themselves teachers, having itching ears; And they shall turn away their ears from the truth, and shall be turned unto fables. But watch thou in all things, endure afflictions, do the work of an evangelist, make full proof of thy ministry.” II tim. 4:1-5 (KJV)

      I ACCUSE YOU OF NOT CARIN’ THAT YOUR LOST LOVED ONES ARE TO BURN IN HELL!!! Time to MAN UP Jim!

      • http://blog.dynamiclifeenterprises.com/ Jim

        I rest my case. Tom, I urge you to get help immediately. You are in my prayers along with all those that might have turned to God but you have turned away.

        • Tom W.

          And in my humble opinion, it is you who has turned away Jim, I also will pray for you. I’ve a GOOD feelin’ it won’t be long before we find out who’s right!!!

      • Tom W.

        Well go to HELL then Michelle, but you won’t be able to claim ignorance even though the shoe would probably fit like a glove! LOL!!! HE LOVES YA ANYWAY!

  • albert

    I grew up poor. I was taught to work hard and save. I did. I got an education, worked hard and invested all that I could. Now I can live comfortably, I was able to provide jobs and am able to contribute to veteran’s organizations and other charaties because of income off investments. So, by liberal standards, I am a bad person! Wow! Maybe if we shut down the Fortune 500 companies, life would be better(?). I’ve been poor and I’ve been rich (excuse the 4-letter word), And I like rich a whole lot better.

  • Kay

    Tom W.,

    I realize I am getting off topic, but when someone starts talking about salvation, I often see the need to jump in and make sure salvation is clearly understood. Because we can work hard, invest our money wisely, and do well in this life, but think about how long eternity is going to last! Just want to state, so that people understand, we are not saved by doing good works. I know that you know that, but I just want to clarify that point. If a person is truly saved, if he has truly repented of his sins and trusted in Christ alone for salvation, then the good works will be EVIDENCE of salvation. The good works naturally follow if we are truly saved.

    No amount of good works can make up for all the many times we have broken God’s laws. Who of us have not lied countless times over the course of our lives, or stolen something (regardless of the value of the item), or disobeyed parents? Who can claim they have loved God with all their heart, soul, mind and strength? Who of us can claim to have a perfectly pure heart free of lust (which Jesus said was the same as adultery) or free of hate (which the Bible equates with murder)? We have all broken God’s laws countless times. However, Jesus died on the cross to take the penalty for our sins, and He bore the wrath of God for our sins, although He never once sinned Himself. And He rose from the dead, defeating death. If we will repent of our sins and turn from them, and trust in Christ alone for our salvation, we can be saved from the wrath of God, which is a just wrath because we are guilty of breaking His laws.

    This is a kind offer that God makes to us. May God grant the hearers repentance unto life.

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