Whats the Optimal Payout Ratio?
Now that you know how to calculate payout ratio, it’s a good idea to consider what the ideal payout ratio is. As is the case with most financial yardsticks, however, there is no hard-and-fast answer to that question. Payout ratio is like temperature: What might please one investor won’t suit another, and you have to go with what you’re comfortable with. Usually, investors’ first reaction to the payout ratio is to conclude that the higher the ratio, the better the dividend. That’s perfectly natural. After all, who wants to leave money on the table? But while everyone likes to earn the greatest return possible, a 100% payout isn’t the best practice, as the company will need some of that cash to operate. What’s more, it might be wise to keep a little cash on hand in case an opportunity, such as an acquisition, presents itself. It’s also prudent for a company to allow itself some dividend breathing room. If it commits to a high dividend and business conditions change, the company might fin
