Dividend Yield vs Payout Ratio: Wetin Be Difference?

Dividend yield vs payout ratio na two different structural things: dem get the same numerator, but dem divide am by different denominator. Yield divide dividend by share price, so e dey re-price on every trade and e no tell you anything about the company itself. Payout ratio divide that same dividend by earnings, so e only changes when the business changes. Na this one dey show whether dividend fit continue.

Dividend yield vs payout ratio, side by side

Dividend yield na cash wey dem pay per share for the trailing year, divide by current share price, and quote am as percent. Payout ratio na that same trailing dividend per share, divide by earnings per share for comparable period, and quote am as percent too. Each one get im own mechanics. One side get forward vs trailing quotes, while the other get different possible earnings bases. We cover these for our dividend yield explainer and payout ratio guide. This page dey explain wetin both numbers mean when you read dem together.

The panel below run both calculations for eight big dividend payers, using one numerator: cash wey dem actually pay per share for the trailing 365 days, taken from the dividend record itself.

WITH trailing_dividends AS
(
    SELECT
        ticker,
        sum(amount) AS dividend_per_share
    FROM
    (
        SELECT
            ticker,
            id,
            any(toFloat64(cash_amount)) AS amount
        FROM global_markets.stocks_dividends
        WHERE ticker IN ('AAPL', 'ABBV', 'COST', 'CVX', 'HD', 'IBM', 'JNJ', 'KO')
          AND ex_dividend_date >  today() - 365
          AND ex_dividend_date <= today()
          AND frequency > 0
          AND currency = 'USD'
        GROUP BY ticker, id
    )
    GROUP BY ticker
),
latest_ratios AS
(
    SELECT
        ticker,
        argMax(toFloat64(price), date)              AS share_price,
        argMax(toFloat64(earnings_per_share), date) AS eps_ttm
    FROM global_markets.stocks_ratios
    WHERE ticker IN ('AAPL', 'ABBV', 'COST', 'CVX', 'HD', 'IBM', 'JNJ', 'KO')
      AND date >= today() - 45
    GROUP BY ticker
)
SELECT
    d.ticker                                             AS ticker,
    round(100 * d.dividend_per_share / r.share_price, 2) AS dividend_yield_pct,
    round(100 * d.dividend_per_share / r.eps_ttm, 1)     AS payout_ratio_pct
FROM trailing_dividends AS d
INNER JOIN latest_ratios AS r ON r.ticker = d.ticker
WHERE r.share_price > 0
  AND r.eps_ttm > 0
ORDER BY payout_ratio_pct DESC

When dem sort by payout ratio, ABBV dey top of the eight. E distribute 191.9% of im earnings with dividend yield of 2.74%. For the bottom of the same list, AAPL pay out 12.6% of earnings with yield of 0.35%. The columns fit disagree: hypothetical 2% yield fit sit on payout ratio near 20% or near 90%. Yield alone no go tell you which one e be.

Why dividend yield fit move even when company no do anything

Board dey set dividend few times every year. But the price wey dey inside the denominator dey update on every trade. If price fall and dividend remain the same, yield go rise. Nothing for the company change at that moment. The same thing happen in reverse when price rise: stock wey rally go print smaller yield on unchanged dividend.

The trace below follow Coca-Cola month by month for three years. E show both parts of the fraction: trailing dividend per share, plus the yield wey that dividend produce against the month closing price.

WITH monthly_close AS
(
    SELECT
        toStartOfMonth(date)           AS month_start,
        argMax(toFloat64(close), date) AS month_close
    FROM global_markets.stocks_daily_aggs
    WHERE ticker = 'KO'
      AND date >= toStartOfMonth(today() - 1095)
      AND date <= today()
    GROUP BY month_start
),
ko_dividends AS
(
    SELECT
        ex_dividend_date            AS ex_date,
        any(toFloat64(cash_amount)) AS amount
    FROM global_markets.stocks_dividends
    WHERE ticker = 'KO'
      AND ex_dividend_date > today() - 1500
      AND frequency > 0
    GROUP BY id, ex_dividend_date
)
SELECT
    toString(m.month_start)                            AS month,
    formatDateTime(m.month_start, '%b %Y')             AS month_label,
    round(sum(d.amount), 4)                            AS trailing_dividend_per_share,
    round(100 * sum(d.amount) / any(m.month_close), 2) AS dividend_yield_pct
FROM monthly_close AS m
CROSS JOIN ko_dividends AS d
WHERE d.ex_date <= toLastDayOfMonth(m.month_start)
  AND d.ex_date >  toLastDayOfMonth(m.month_start) - 365
GROUP BY m.month_start
ORDER BY m.month_start

The numerator almost no move. E read $1.8 per share for Aug 2023 and $2.08 for Aug 2026, as e increase once every year according to the company own schedule. You fit see the full record for Coca-Cola's dividend history. Yield na the one wey dey travel. E print 3.01% at the beginning of the window and 2.37% at the end. The shape between both points na the price chart turned upside down. Payout ratio for those same three years for no update more than four times a year, according to the earnings calendar.

The crossing case: bigger yield beside payout ratio above 100%

Two different moves dey affect the same dividend from opposite sides. When price fall, yield rise even though numerator no change. When earnings fall, payout ratio rise even though numerator no change. If both happen for the same year, one dividend go look bigger for quote screen and less covered for the accounts at the same time. Na the basic pattern behind most dividend yield traps, reduced to two numbers.

The screen below show this crossing case live. E cover US-listed companies with market value above $5 billion, where dividend per share for the past year pass earnings per share for the same period. E show the 12 widest yields among dem.

WITH latest_ratios AS
(
    SELECT
        ticker,
        argMax(toFloat64(price), date)              AS share_price,
        argMax(toFloat64(earnings_per_share), date) AS eps_ttm,
        argMax(toFloat64(market_cap), date)         AS market_value
    FROM global_markets.stocks_ratios
    WHERE date >= today() - 30
      AND ticker NOT IN ('SPCX')
    GROUP BY ticker
),
trailing_dividends AS
(
    SELECT
        ticker,
        sum(amount) AS dividend_per_share
    FROM
    (
        SELECT
            ticker,
            id,
            any(toFloat64(cash_amount)) AS amount
        FROM global_markets.stocks_dividends
        WHERE ex_dividend_date >  today() - 365
          AND ex_dividend_date <= today()
          AND frequency > 0
          AND currency = 'USD'
        GROUP BY ticker, id
    )
    GROUP BY ticker
)
SELECT
    r.ticker                                             AS ticker,
    round(100 * d.dividend_per_share / r.share_price, 2) AS dividend_yield_pct,
    round(100 * d.dividend_per_share / r.eps_ttm, 0)     AS payout_ratio_pct
FROM latest_ratios AS r
INNER JOIN trailing_dividends AS d ON d.ticker = r.ticker
WHERE r.market_value > 5000000000
  AND r.eps_ttm > 0
  AND r.share_price > 1
  AND d.dividend_per_share / r.eps_ttm > 1
  AND d.dividend_per_share / r.share_price < 0.30
ORDER BY dividend_yield_pct DESC
LIMIT 12

The widest yield among dem print 14.2%, beside payout ratio of 314%. Payout ratio above 100% get simple meaning: for the past year, company send out more cash per share than the accounting profit per share wey e record. The difference come from balance sheet or borrowing. This no automatically mean say dividend don break. The next two sections explain cases where payers still dey cover the payment comfortably.

Payout ratio based on earnings or free cash flow

Earnings na accounting measure. Depreciation and one-off write-downs dey inside am, but neither one remove dollar from bank for the quarter wey dem record am. Dividends dey paid with cash. When you compare cash payment with accounting profit, the two numbers fit disagree in either direction.

The normal cross-check na free cash flow: cash wey operations generate minus capital spending. Na the cash wey remain after company don spend to maintain im asset base. Our dividend cash flow coverage guide explain the calculation. The panel below compare Coca-Cola dividend with both denominators, one fiscal year at a time.

SELECT
    toString(toYear(period_end))                    AS year,
    round(100 * dividends_paid / net_profit, 1)     AS payout_of_earnings_pct,
    round(100 * dividends_paid / free_cash_flow, 1) AS payout_of_free_cash_flow_pct
FROM
(
    SELECT
        period_end,
        abs(toFloat64(argMax(dividends, (filing_date, period_end))))                     AS dividends_paid,
        toFloat64(argMax(net_income, (filing_date, period_end)))                         AS net_profit,
        toFloat64(argMax(net_cash_from_operating_activities, (filing_date, period_end)))
            - abs(toFloat64(argMax(purchase_of_property_plant_and_equipment, (filing_date, period_end)))) AS free_cash_flow
    FROM global_markets.stocks_cash_flow_statements
    WHERE has(tickers, 'KO')
      AND timeframe = 'annual'
      AND period_end >= '2017-12-01'
    GROUP BY period_end
)
WHERE dividends_paid > 0
  AND net_profit > 0
  AND free_cash_flow > 0
ORDER BY period_end

For fiscal 2025, dividend use 66.8% of net income and 165.8% of free cash flow. Neither line na the true payout ratio. Dem answer different questions. Earnings version ask how much of reported profit dividend dey consume. Cash version ask how much of spendable cash e dey consume. When both lines dey close, company dey turn reported profit into cash at roughly the rate wey income statement imply.

Why REITs dey use FFO instead of EPS

Real estate investment trust own buildings and depreciate dem for income statement. Na charge wey remove no cash. REIT must also distribute at least 90% of taxable income to keep im tax status. When you put both things together, payout ratios based on EPS often print above 100% for property owners whose distributions get enough cash coverage. Industry measure na funds from operations, or FFO. E take net income, add back real estate depreciation, and remove gains from property sales. Our REIT payout ratio guide explain the adjustment. If you run REIT through EPS payout formula, the number fit correct arithmetically but e no get economic meaning.

Wetin count as normal payout ratio

No single threshold dey work for every sector. Utilities and consumer staples fit carry high payout ratios because revenue dey repeat, and dem build capital plans around am. Cyclical businesses like miners and homebuilders dey move with the earnings denominator. Ratio fit low for top of cycle and pass 100% for bottom, even when dividend no change. The eight names for the first panel cover 12.6% to 191.9%. Each figure normal for the business wey print am. Payout ratio useful when you compare am with the same company history and closest peers. As absolute number, e almost no mean anything.

FAQ

Wetin be the difference between dividend yield and payout ratio?

Both start with the same dividend per share. Yield divide am by share price, so e show cash return on today price. Payout ratio divide am by earnings per share, so e show the share of profit wey dividend dey consume.

Stock fit get high dividend yield and low payout ratio?

Yes. This pairing dey show often for companies wey dey trade on low earnings multiples. Yield depend on price, while payout ratio depend on earnings. So if price low but earnings remain strong, stock fit print large yield beside modest payout ratio.

Payout ratio above 100% always mean problem?

No. E mean trailing dividend pass trailing earnings per share. This dey happen normally for REITs because depreciation dey reduce reported EPS. E also common for years wey carry large one-off charge. The next check na coverage against free cash flow.

Which number matter pass for dividend safety?

Payout ratio, when you read am together with cash flow version. Yield na price quote. If yield rise while dividend no change, na statement about share price and nothing else.

Wetin be good payout ratio?

No universal figure dey. Level wey normal for regulated utility fit stand out for cyclical manufacturer. So the useful comparison na company own history and direct competitors.

Every panel here come with the exact SQL underneath am. So you fit trace any figure above to im source or run am again against another ticker. If you want ask the same two questions about company wey you dey follow—wetin the yield be and wetin the payout ratio behind am look like—ask am in plain English for the Strasmore terminal.