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Q How can I find out what inflation’s effect has been over time? — T.W., Strasburg, Virginia A Try the handy inflation calculator at westegg. com/inflation. It can show you, for example, that something that cost $100 in 2000 would cost $139 in 2015.
To learn the average inflation rate over a period, visit measuringworth. com/inflation. (Between 1980 and 2015, for example, it averaged 3.07 percent annually in the U.S.) That site also shows the inflation rate for specific years. Inflation averaged less than 1 percent in 2015 — but topped 13 percent in 1980! Q What’s a “payout ratio”? — G.N., Biloxi, Mississippi A It’s the percentage of a company’s earnings (net income) that’s paid out to shareholders as a dividend. For example, McDonald’s trailing earnings per share was recently $5.24, and its annual dividend was $3.76 ($0.94 per quarter). Divide $3.76 by $5.24, and you’ll get 0.72, or a payout ratio of 72 percent.
A payout ratio above 100 reflects a company paying out more than it’s earning, which is not sustainable over the long run. (A single bad year can give a company a temporarily high payout ratio, though.) Companies with high payout ratios often have little flexibility regarding what they can do with their cash. That can be OK for big, established companies that don’t need to reinvest much in their businesses. Reinvested earnings can sometimes return less than shareholders could get investing the payout on their own.
Consider a very steep payout ratio a red flag, as the company may have to reduce its dividends. Low payout ratios suggest lots of room for dividend increases. To see our recommended dividend-paying stocks, try our “Motley Fool Income Investor” newsletter for free (at fool.com/shop/newsletters).
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