Receiving dividends from stock you own is great, but you want to make sure the company can afford to keep them coming. Companies pay dividends from their earnings, or profits. The dividend payout ratio measures the percentage of profits a company pays as dividends. When a company generates negative earnings, or a net loss, and still pays a dividend, it has a negative payout ratio. A negative payout ratio of any size is typically a bad sign. It means the company had to use existing cash or raise additional money to pay the dividend.
Locate a company’s income statement and statement of stockholders’ equity in its most recent Form 10-K annual report. You can download a Form 10-K from the investor relations section of a company’s website or from the U.S. Securities and Exchange Commission’s online EDGAR database.
Find the amount of negative earnings at the bottom of the income statement. The income statement shows a net loss enclosed in parentheses. For example, if a company’s income statement shows “net loss ($25 million),” it had negative earnings of $25 million.
Identify the amount of dividends the company paid during the year to preferred and common stockholders on the statement of stockholders’ equity. In this example, assume the company paid $40 million to common stockholders and $10 million to preferred stockholders.
Add the preferred and common dividends to determine the total dividends paid during the year. In this example, add $40 million and $10 million to get $50 million.
Divide the total dividends by the negative earnings. Multiply your result by 100 to calculate the negative payout ratio as a percentage. Concluding the example, divide $50 million by -$25 million to get -2. Multiply -2 by 100 to get a payout ratio of -200 percent.
- Calculate a company’s payout ratio for past years to determine how long it has been negative. A negative payout ratio for one year might be a small problem for the company to overcome, but a consistently negative payout ratio might force the company to reduce or eliminate its dividend.
- For a profitable company, a good payout ratio is positive and typically less than 50 percent. This means the company generates positive earnings and pays out less than 50 percent of them as dividends.