How can a company continue to pay dividends with a 200 percent payout ratio?
First, you have to make sure you’re comparing apples to apples. Common stocks’ payout ratios are based on earnings per share. But master limited partnerships (MLP), Canadian income trusts, real estate investment trusts and even some corporations–such as rural phone-service providers–don’t pay their dividends from earnings per share. Rather, they try to minimize taxable earnings in order to maximize cash flow, from which they pay distributions. In their case, the key number is distributable cash flow per share. Once you’re sure you’re looking at the right metric, the next key is earnings power. A company or MLP, for example, can certainly have a bad quarter during which its payout ratio soars. Some companies, such as propane or natural gas distributors, essentially make all of their money in the winter months, when demand for heat is highest. As a result, income is nil or negative the rest of the year, which also results in a sky-high payout ratio. The key to distribution safety is lo
