Dividend Payout Ratio Formula & Definition – Analyzing Blue Chip Stocks

Dividend investing is one of the most common forms of income investing. The idea is to look for stocks that pay high dividends and offer stable growth. In doing so, not only does the investor enjoy growth in share prices, they receive a quarterly or annual dividend payment that transfers some of the company’s wealth back to their shareholders.

With the opportunity to cash in and enjoy value growth, dividend investing is popular, not only among expert investors, but also to the greenhorns of the investing community.

Beginner investors often make the mistake of chasing high dividends without understanding exactly what they are, and the dangers of a high dividend payout ratio can be a warning sign of.

What Are the Dividend Payout Ratio and Retention Ratio?

Investors often use various ratios as a way to determine the quality of an investment. Two key ratios for investors focused on stocks that provide dividend payments are known as the dividend payout ratio and the retention ratio.

Dividends are paid out of net earnings. After all, if dividend payments accounted for more than the company generated in profits, it would have to tap its cash reserves or go into debt in order to pay declared dividends to investors.

The dividend payout ratio and retention ratio give investors an at-a-glance view of how the company divides its income. The percentage of earnings the company pays to investors is the dividend payout ratio, and the percentage of earnings kept in order to fund the future growth of the company is the retention ratio.

For example, if company XYZ generated net income of $100 million and paid $20 million to investors — choosing to hold $80 million in retained earnings to fund growth — the dividend payout ratio comes to 20% and the retention ratio is 80%.

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What Is a Good Dividend Payout Ratio?

As an investor, you want the highest amount of dividends you can get your hands on, right? Well, not exactly.

Investing is all about putting your money to work, allowing time to pass and compound gains to work their magic. It’s important to keep in mind that dividends are a transfer of wealth, not free money.

When a company pays a dividend to its investors, its stock becomes less valuable. A stock with $100 million in cash on its balance sheet is generally more appealing than a company with $80 million.

So, dividends are a give and take, and focusing solely on high dividends can cost you tremendous value in the long run.

So, what exactly is a good dividend payout ratio?

The answer to that question has more to do with your financial goals, comfort with risk, and investing strategy. For most dividend investors, a dividend payout ratio somewhere between 30% and 55% is compelling. Payout ratios below 30% are considered low and above 55% are considered high.

Nonetheless, there are pros and cons to both low payout ratios and high payout ratios.

Low Payout Ratio Pros and Cons

Who wants a low dividend payout ratio? Aren’t you investing to earn money? You might be surprised at the benefits a low dividend payment may have on your investment portfolio’s total returns.

Pros of a Low Payout Ratio

There are several benefits to a lower payout ratio. There are several good reasons for a company to retain more of its income rather than paying our large dividends to shareholders. Some of the most important to consider include:

  • It Costs Money to Make Money. At first glance, seeing a company’s earnings either not being shared at all or only being shared in a small way seems like a bad thing for investors. However, it costs money to make money. Publicly traded companies on the leading edge of innovation in their fields spend massive amounts of money on research and development, which results in higher-value assets and a higher probability of market dominance ahead. As a result, seemingly costly innovation often becomes the goose that lays the golden eggs down the line.
  • Balance Sheet Improvements. A strong balance sheet is important for any publicly traded companies. By choosing to make smaller dividend payments, or choosing not to make dividend payments at all, companies have the ability to bolster their balance sheets. Building up cash reserves or paying down costly debts improves the company’s ability to weather a downturn, which leads to stronger investor interest and ultimately higher stock prices.
  • Acquisitions. Acquisitions are a costly but potentially valuable proposition. By purchasing smaller companies in the same field, larger companies have the ability to use their connections to reduce costs at the smaller company while bringing their products, technologies, and audience in house, greatly expanding revenue potential. Money held back from a company’s earnings that’s used for accretive acquisitions is often money well placed.

Cons of a Low Payout Ratio

Although a low payout ratio comes with its perks, there are a couple of drawbacks to a company’s dividend payout ratio being low.

  • Low Dividend Payments. Low payout ratios generally relate directly to low dividend payments. If you’re investing with the goal of earnings stock dividends, a low payout ratio may not be a good prospect for you.
  • Possible Sign of Financial Struggles. Dividend payments aren’t a requirement among publicly traded companies. In fact, there are plenty of them that simply don’t pay dividends at various levels of success. Oftentimes, companies have a low payout ratio because they’re investing the majority of their net earnings back into growth. In other cases, companies simply don’t make enough money to afford to pay dividends. As such, before investing in a company with a low dividend payout ratio, make sure to research its balance sheet, cash flow statement, and other financial statements to ensure the company is built on a strong financial foundation.

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High Payout Ratio Pros and Cons

There are obvious benefits to a high dividend payout ratio. After all, a high payout ratio means that you’ll enjoy high dividend payments. But you’ll find thorns on every rose, and a high payout ratio could lead to similar pain.

Pros of a High Payout Ratio

There are several reasons investors get excited about a high payout ratio. Some of the most significant include:

  • High Dividend Payments. The most obvious reason some investors look for high payout ratios is that high ratios directly equate to high dividend payments. If your primary goal is to generate dividend income, a high payout ratio is appealing.
  • Financial Stability. In most cases, a high dividend payout ratio is a sign of financial stability. The company doesn’t have to pay dividends to its investors at all. So, if it chooses to pay a high dividend, it usually has the strong balance sheet and compelling cash flow to back it up.
  • Potential for Reinvestment. Old school investors will tell you to buy dividend stocks and reinvest your dividend payments in order to achieve compelling total returns on long-term investments. The larger percentage of total net income you receive in dividend payments, the more money you’ll have for dividend reinvestments.

Cons of a High Payout Ratio

Although a high dividend payout ratio is appealing for many reasons, it’s also concerning in some cases. There are a few red flags to watch out for before investing in a stock that offers a high payout ratio:

  • Market Saturation. Oftentimes the leaders of a saturated market will make seriously high dividend payments, offering up the vast majority of their net earnings to investors. Once a company comes to dominate a market that it largely has control of, it is comfortable sharing its wealth with shareholders in a big way. Sure, that’s exciting — but market saturation also means tapped growth potential. If you already control a market so completely that you can’t find a compelling use for reinvesting your excess income, there’s not more market share to take from competitors. You only take part in overall market growth, so you don’t have the momentous growth opportunities smaller companies have. As such, a high payout ratio generally comes with little opportunity by way of share price appreciation.
  • Failure to Innovate. If a company doesn’t hold enough of its net income back to fund innovation, its failure to stay ahead of the curve could lead to its demise. Even established companies fall when innovation is lacking. Think of BlackBerry — the smartphone pioneer has become nothing more than a lagging tech stock, losing tens of billions of dollars worth of market capitalization over the past decade. A high dividend payout ratio may be a sign that a dominant company is getting too comfortable and may soon lose its position as a leader in its market.
  • Recessions Happen. Economic recessions and bear markets have been commonplace throughout history. Past earnings aren’t always indicative of future earnings, and economic fluctuations often play a major role in that fact. If a company fails to hold enough of its net earnings back during the good times, its balance sheet may not be strong enough to make it through a recession without significant losses to its stockholders.

Other Considerations to Think of When Investing for Dividends

If your goal is to generate income by investing in dividend stocks, you’re on the right path. Countless people have followed that path to wealth in the past, and plenty more will do the same in the future. However, the dividend payout ratio isn’t the only number investors should focus on when investing for dividends.

Dividend Yield

The dividend yield is another ratio investors use to gauge the quality of dividend payments an investment in a stock will provide. The dividend yield compares the total amount of dividends over the course of a year to the price an investor pays for a stock.

High dividend yields are often the goal. However, a high yield can also be a warning sign. For example, energy companies are known for paying compelling dividends. When oil prices are up and these companies are doing well, their dividend yield shrinks as their stock price grows. Conversely, when oil prices are down and these companies are struggling, the dividend yield increases as the stock price shrinks.

At these points, many in the energy sector may struggle to keep dividend payments high in order to attract new investors. However, the high dividend yield could be a trap, driving new investors into a diving stock.

So, although you’ll want to be paid relatively high dividend yields, make sure to do your research to ensure that the high yield is not the result of economic inefficiencies in the company or declines in the sector as a whole.

Dividend Sustainability

Sometimes you’ll become interested in an investment opportunity because of high dividend payments, only to find that its dividends begin to shrink in the coming months.

Ultimately, dividend investing requires research, not only into the dividends provided by the company, but how sustainable those dividends are. The higher the dividend payout ratio and dividend yield, the higher the probability of dividend sustainability issues.

Do your research, not just by looking at dividend payout ratio and dividend yield, but by looking into the company’s saturation of its market, innovation, and other factors that will lead to continued growth and the continued ability to pay compelling dividends.

Total Rate of Return

A high dividend payment doesn’t always mean that you’ll experience a high return. For example, a dividend yield of 3.5% or higher on a stock is considered high. If that 3.5% is added to another 6.5% of stock price appreciation over the course of a year, the total annualized rate of return on the investment would come to 10%.

However, high dividend payments are often coupled with slow or no share price appreciation. If you invest in a stock with a high 3.5% dividend yield, but the stock price only grows 2% annually, your total annualized rate of return is 5.5%, lagging far behind the average market growth rates of the major benchmarks. You’d be better off investing in low-cost index funds.

Form of Dividends

Dividends come in two forms. They will be paid in either cash or stock. For example, if a company pays a cash dividend, the total amount of dividends will be divided by the total number of outstanding shares and paid accordingly.

If the dividend is a stock dividend, the company will announce how many shares will be given to each shareholder per share owned. For example, a company may offer a dividend of .05 shares per share owned, representing a dividend yield of 5%.

However, be careful with dividends that are paid in stock. Oftentimes, cash payments will not be offered for fractional shares. As a result, if you don’t own enough shares to earn a full share as your dividend payment, you may not receive a dividend payment at all.

Dividend Reinvestment

There are two purposes for investing in dividend stocks. Either the investor is seeking income, with dividends providing quarterly or annual payments they can count on, or they’re looking for long-term growth generated by reinvesting dividend payments.

If you don’t have an immediate need for the additional income that dividends provide, you have the opportunity to harness the power of compounding gains by reinvesting all or a percentage of your dividend payments into the purchase of new shares. Most brokerages allow you to do this automatically, turning cash dividends into additional shares with each payment, without you ever having to lift a finger.

Preferred Stock or Common Stock

Before following a dividend investing strategy, it’s important that you do your research to get an understanding of the benefits and drawbacks offered up by preferred stock and common stock.

Dividends are paid differently for different types of stock. For example, with common stock, dividends can fluctuate up or down or stop completely at the company’s discretion. With most classes of preferred stock, dividends are predetermined and will stay fixed as long as you hold the stock.

General Due Diligence

Regardless of how significant a company’s declared dividend is, it should not be the sole reason for an investment in any stock. Before making an investment, it’s important to do your general due diligence.

In other words, ask yourself this simple question, “Would I buy this stock if it didn’t offer dividends?” If the answer is “no,” move on and look for a better opportunity.

Dividend Investing Has Its Time and Place

Dividends are a give-and-take. Most stocks that are known for compelling dividend payments are known for relatively slow, steady growth. As a result, a high dividend stock allocation is great during bear markets.

On the other hand, during bull markets, dividend stocks don’t experience the dramatic growth seen in the overall market. So, when the market is hot and stock prices are on the rise, you may want to reduce your exposure to dividend stocks in order to free up funds to take advantage of the figurative running of the bulls on Wall Street.


Final Word

Dividends are an exciting concept. If a stock sees compelling share price appreciation and pays dividends, investors get to have their cake and eat it too. However, there aren’t many stocks on the market that are known for both compelling dividends and compelling price growth.

Although dividend stocks are a great option for a well balanced portfolio, only focusing on dividends could lead to stagnant growth — or worse, losses.

When making an investment, make sure to take a comprehensive look at the company, gauging its financial stability, its past and future pipeline of innovation, and its drive either to become the leader of its industry or to maintain its crown.

Dividend investing has made many millionaires, and will make plenty more in the future. Making educated investments and following a dividend investing strategy may be your ticket to being the next stock market success story.

Source: moneycrashers.com

One-stop-shop trend continues with Propertybase’s Unify buy

With its acquisition of Cross Media this week, real estate software provider Propertybase joins a host of companies completing mergers and acquisitions with the goal of becoming an all-encompassing one-stop shop for housing-related needs.

Cross Media owns Unify, a customer relationship management platform for the residential mortgage industry aimed at lead generation and client retention, as well as real-time loan origination system integration. The company works with roughly 80 mortgage companies in North America, mining and analyzing potential borrower data through automation to produce higher-intent leads. Its new owner, PropertyBase, offers lead generation, CRM, compliance management and other software tools, which are used by 4,500 real estate entities across the country, the company said.

Unify will operate as an independent business unit under the new ownership, but other terms of the deal were not disclosed.

Vance Loiselle, CEO of Propertybase

Recent studies have shown that 2021 should be a big year for industry consolidation and increased use of built-out technology to boost operational efficiencies. With its purchase of Cross Media, Propertybase recognizes the need to cover the entirety of a real estate transaction, CEO Vance Loiselle told National Mortgage News. The acquisition fits the next phase of the company’s vision to enhance its network in the “digital-first world,” he said.

The marriage of lead generations should connect the dots from purchasing a home to financing it.

“Now is the perfect time to transcend the gap between technologies and to further align ancillary services,” Loiselle said. “In addition, as the mortgage industry continues to benefit from refinancing, it will be imperative to proactively support mortgage brokerages with software to handle these requests as well as generate new leads.”

Source: nationalmortgagenews.com

Zillow follows Saturday Night Live spoof with record profit

Zillow Group Inc. has cemented its role in the pandemic-era zeitgeist, with “Saturday Night Live”poking fun at homebound millennials who lust after online home listings.

The growing popularity of the company’s websites and apps has also earned the company record profits during the fourth quarter, with adjusted earnings before interest, taxes, depreciation and amortization of $170 million, according to a statement on Wednesday.

That beat the average analyst estimate of $125 million and represented a wide swing from a $3.2 million loss a year earlier period. The results sent shares surging as much as 13% to $193.39. The company’s stock had already jumped more than 600% since bottoming out in March.

The rally comes amid a housing boom in the U.S. that has been fueled by low mortgage rates. With Americans confined to their homes, Zillow scrolling has become a national pastime.

“Because of all the people who are stuck at home, dreaming about a new home, and because of all the millennials having babies and shopping for homes, the Zillow brand has broken through to a new level of awareness and cultural significance,” Zillow Chief Executive Officer Rich Barton said in an interview. “There’s lots more shopping, lots more dreaming, and lots more fantasizing.”

Zillow’s websites and apps received 2.2 billion visits during the fourth quarter. That drove revenue growth in the company’s core marketing business, which brought in $314 million, up 35% from the prior year.

Zillow’s booming marketing operation has shifted the spotlight away from its nascent home-flipping initiative. The company acquired 1,789 homes in the quarter, compared to 1,787 a year earlier, as it returned to pre-Covid purchasing levels after slowing acquisitions earlier in the year.

Zillow also announced it has agreed to pay $500 million to acquire ShowingTime.com Inc., which makes tools for house-hunters to arrange home tours with agents. The purchase fits a key theme in the U.S. housing market in recent months, as socially-distancing efforts and the coming-of-age of millennial homebuyers drives more house-hunting functions online.

That theme has also been good for other companies at the intersection of technology and the U.S. housing market. Shares in brokerage Redfin Corp. have soared, and next-generation home-flipper Opendoor Technologies Inc. went public through a merger with a blank-check company.

Barton said that Zillow, along with consumers, will benefit from the increasing digitization of the homebuying process.

“The seller and the buyer are going to win from more innovation, happening faster,” he said. “It’s long overdue.”

Source: nationalmortgagenews.com

Lower taxes, more M&A: Behind a California bank’s move to Texas

First Foundation in Irvine, Calif., is ready for its next act — in North Texas.

Lured by opportunities to beef up lending, add wealth management clients and pursue acquisitions of community banks — and the promise of lower taxes over time — the parent of First Foundation Bank is relocating its corporate headquarters from California to Dallas this spring. Executives are scouting locations near Plano for a potential branch that could open within the next six months and are gearing up to hire as many as 35 new employees by the end of this year.

The relocation — announced in late January during the company’s quarterly earnings call — is part of a plan to boost assets from $7 billion to $10 billion by 2023.

When First Foundation “started figuring out how to get to the growth numbers” it sought, “we decided that we need other markets to help us get there,” CEO Scott Kavanaugh said this week. “And the Dallas metroplex is such a strong marketplace that we felt very compelled to try to build out there.”

First Foundation is the latest in a string of companies fleeing California for Texas, joining Charles Schwab, Toyota Motor North America and Jamba Juice and others that have moved to the Dallas-Fort Worth market.

Seven hundred sixty-five companies left California in 2018 and 2019, on top of an estimated 13,000 companies that left the state between 2009 and 2016, according to a California economics newsletter published by the Hoover Institution, a think tank at Stanford University.

Kavanaugh said companies view Texas as being more business-friendly than California, where taxes are high, regulations can be tough and growth opportunities are limited.

First Foundation’s taxes will decrease over several years as the company ramps up loan production and starts earning more profits outside of California, Kavanaugh said. A more immediate benefit of the relocation, however, is a healthy multifamily lending space in Dallas, where the percentage of vacancies is low and monthly rental fees are rising thanks to the region’s robust population growth.

At the end of December, the number of residents in the Dallas-Fort Worth area topped 7.8 million, a new high, according to a Cushman & Wakefield report.

As it settles into Texas, First Foundation will focus on multifamily lending, at least in the near term, Kavanaugh said. Right now, multifamily lending is the largest segment of the company’s loan portfolio, accounting for 42% of the mix as of late December, though the company is doing more commercial and industrial lending, which accounts for 26% of the portfolio.

In the multifamily sector, JPMorgan Chase is First Foundation’s largest competitor in California, but in Dallas the market is “a little bit more fragmented,” Kavanaugh said.

“Real estate lending is usually easier to build” in a new market, First Foundation Bank President David DePillo told investors last month. But as time passes, the company will “start layering in C&I and consumer” loans, along with wealth management products, he said.

The company will seek Texas trust powers after it opens its first branch, Kavanaugh said. It is also planning to host its annual shareholders meeting in Dallas this year, he added.

There are no plans to change the headquarters of the bank or the wealth management business, which will remain in Irvine for now, Kavanaugh said.

The shift to Texas won’t have “an overnight effect” on the company, but focusing on multifamily is a solid starting point, said Gary Tenner, an analyst at D.A. Davidson.

“Multifamily, if you bring on the right people, is clearly a space where you could grow pretty quickly if you source the right people, so I have no doubt they can do that,” Tenner said. “In terms of more traditional C&I, that’s a longer sales process … and more commodified. It’s the same with wealth management. You have to source the right people to bring over the assets and I think all of that takes time.”

The company considered Denver, Florida and other markets, but ultimately decided that Dallas would provide the best chance for expansion, including by way of M&A, Kavanaugh said. There were more than 400 community banks in Texas as of Sept. 30, according to Federal Deposit Insurance Corp. data.

“In the Dallas metroplex area, there are more than you can shake a stick at in terms of community banks,” Kavanaugh said. “Now, whether they’re willing to consider M&A, that’s a different topic, but I do believe there’s great opportunity for consolidation in the Texas marketplace.”

There have been discussions with potential sellers, but nothing has been worked out yet, he said.

HoldCo Asset Management disclosed last month that First Foundation tried to initiate merger talks with the $9.7 billion-asset Boston Private Financial Holdings. HoldCo, a Boston Private investor, is upset that the company agreed to be sold to SVB Financial in Santa Clara, Calif.

HoldCo, in a letter to Boston Private CEO Anthony DeChellis, shared the contents of an email from Kavanaugh stating that he had “persistently” called DeChellis “to pursue a dialogue about a merger.” First Foundation was told in late November that Boston Private’s board had instructed DeChellis to focus internally and that the company was “not interested in pursuing a sale.”

First Foundation is not the first out-of-state bank to relocate to Texas seeking more growth and acquisition opportunities. In 2007, Comerica moved its headquarters from Detroit to Dallas and about three years later struck a deal to acquire Sterling Bancshares in Houston.

For Kavanaugh, a University of North Texas graduate, the move is a homecoming of sorts. He moved to California from Dallas in 1986 and helped launch First Foundation Bank in 2007.

Kavanaugh is building a home in the area, which he expects will be finished in April.

The relocation will mark First Foundation’s third expansion outside California, where it launched the first of its two units, First Foundation Advisors, in 1990. In 2012, it opened a branch location and an adviser office in Las Vegas and two years later did the same thing in Honolulu.

Today, the company has 20 branches, all but two in California, and employs about 500 people, roughly 75% of them based in Irvine. Over time, certain operations and other back-office jobs in Irvine will shift to Dallas, but how quickly that will happen hasn’t been decided, Kavanaugh said.

“I’ve had quite a few CEOs call me and ask” about the relocation, he said. “A lot of people are saying, ‘We think it’s a smart move.’ ”

Source: nationalmortgagenews.com

Guaranteed Rate acquires DTC lender Owning Corporation

Fresh off its acquisition of Stearns, Guaranteed Rate has picked up Owning Corporation, a direct-to-consumer mortgage lender.

The acquisition gives Guaranteed Rate, best known for its retail prowess, another engine to boost its growth in the direct-to-consumer channel.

Terms of the deal with Orange, California-based Owning were not disclosed.

According to Guaranteed Rate, Owning’s direct-to-consumer platform processed over $20 billion in total loan volume in 2020.

“We’re actively seeking strategic acquisition opportunities to strengthen our position in growth channels,” said Guaranteed Rate’s President and CEO Victor Ciardelli in a statement. “The addition of Owning complements our existing Consumer Direct business, building on our momentum and further accelerating expansion in that segment.”


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Like virtually all residential mortgage lenders, Chicago-based Guaranteed Rate had its best-ever year in 2020, originating about $73 billion in mortgages.

In early January, it acquired Stearns Holdings, a multichannel lender who originated about $20 billion in 2020.

With the acquisitions of Stearns and Owning, Guaranteed Rate now has a stable of profitable joint-ventures, some of the nation’s top-producing retail loan officers, access to the wholesale channel and a stronger direct-to-consumer platform to grow its refi business.

Guaranteed Rate, founded in 2001 in Chicago, is now firmly a top-10 mortgage lender in the U.S. It grew nearly 100% in 2020. Last year, the mortgage firm also had two loan originators produce over $1 billion in mortgages: Ben Cohen and Shant Banosian.

According to the NMLS, Owning has 62 loan officers and was formed in 2018. The company appears to be only licensed in California. It specializes in low-rate mortgage refinances, in which it originates a loan with no closing costs, including appraisal, credit report, escrow and title. The firm also has a zero down purchase mortgage program in California and several programs that appear related to iBuying.

Source: housingwire.com