Payout Ratio Worries

QAIf a company pays out more in dividends than it has in earnings, should I stay away from it? — C.H., Saginaw, Michigan Not necessarily, but doing a little more digging into the company is a good idea. What you’ve noticed is referred to as a company’s “payout ratio” — the sum of its annual dividends per share divided by its earnings per share (EPS) for the year. A ratio below 1.0 (100%) means the company has enough earnings to cover its dividend obligations, and a much lower ratio usually reflects lots of room for dividend growth in the future.

On the other hand, a ratio above 100% reflects a company that’s paying out more in dividends than it’s generating in net income. That’s not necessarily bad, if the company

has ample cash on hand to handle it and if it’s just due to a temporary problem — such as, perhaps, a supply chain issue. (If the company is facing long-term problems, it may end up reducing, suspending or eliminating its dividend.) A steep payout ratio warrants a closer look into what’s going on at the company.

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My mutual fund is apparently closed to new investors. Should I worry? — D.K., Keene, New Hampshire Nope. Mutual funds will occasionally close to new investors for a time, if their managers find themselves with more shareholder dollars to invest than great ideas for where to invest them. This way, they don’t have to deploy shareholder money into second- or third-tier

investment ideas. (Some funds will enact a “soft close,” meaning that they strictly limit new investments, usually to existing shareholders.)

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