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Payout ratios explained
THE MOTLEY FOOL
Ask the Fool
Published: January 14, 2021
Q: Can you explain payout ratios? -- M.W., Bradley, Illinois
A: A company's payout ratio is the percentage of its earnings (net income) that's paid out to shareholders as dividend income. For example, PepsiCo's trailing earnings per share (EPS) over the past year were recently $5.05 and its annual dividend was $4.02 ($1.023 per quarter). Divide $4.02 by $5.05 and you'll get 0.80, or a payout ratio of 80%.
A payout ratio above 100% reflects a company paying out more than it's earning, which is not sustainable over the long run. (It can be OK in the short term, if the company is going through a temporary rough patch.) A high payout ratio -- say, 80%, 90% or more -- gives a company little flexibility regarding what it can do with its cash. That can be OK for big, established companies that don't need to reinvest much in their businesses. A low payout ratio reflects lots of room for dividend increases.
Consider a very steep payout ratio a red flag, as the company may have to reduce its dividend. For lists of our recommended stocks, with and without dividends, check out one of our investor services, at Fool.com/services.
Q: How many stock mutual funds exist? -- R.P., Beaverton, Oregon
A: According to the Investment Company Institute, as of November 2020, there were about 7,677 mutual funds in the U.S., with about 4,478 of them focused on stocks. It's worth counting exchange-traded funds (ETFs), too, as they're also pooled money invested in portfolios of various securities. As of November, there were 2,165 ETFs, 1,634 focused on stocks.
To learn more about investing in mutual funds and ETFs, visit Morningstar.com or the "Investing Basics" nook at Fool.com.
Fool's School
Short on Cash? You Have Choices
It's common to suddenly face an unexpected expense -- or simply to be severely short on cash. Ideally, you'll be ready for such unwelcome developments with your well-stocked emergency fund. But if you don't have an emergency fund (yet), you do have some other options, though many have significant downsides:
You can borrow money -- from friends, relatives or a bank, via a personal loan. That can provide relief, but you'll need to repay the loan. Failing to do so could damage relationships or hurt your credit rating.
You might also borrow based on any equity you have in your home, via a home equity loan or a home equity line of credit -- or you might refinance your mortgage, taking out cash in the process. These strategies can offer better interest rates than other loans, but they're secured by your home, putting your homeownership at risk.
You can address cash shortfalls by charging expenses on your credit card, but if you're already deep in debt, that can just make a bad problem worse. It's especially bad if your credit card is charging a high interest rate, as most do. See if you can get a 0% APR credit card instead, which offers an initial period charging 0% interest. Aim to completely pay off what you've charged during that period.
Retirement accounts and even life insurance policies may also offer funds you can borrow or cash out, but by doing so, you could short-change your retirement nest egg and leave less money for your heirs when you pass away.
Among the best strategies, if you can manage them, are to spend less and to earn extra money via a side gig. There are many ways to earn more income, and a little research online will help you find appealing ones. For example, you might drive for a ride-sharing service; rent out space in your home via Airbnb or a similar service; tutor students online; make and sell crafts on Etsy and elsewhere; or sell unwanted items from your closets, garage or attic.
My Smartest Investment
Mentors: Great Investments
My smartest investments ever have been lunches with my mentors -- because their experience has been tried and tested. -- G.R.L., online
The Fool responds: Few people think of mentoring as investing, but as you suggest, it's an excellent kind of investing -- in someone's future.
If you're young -- or even midway through a career -- you'd do well to seek out people willing to serve as mentors for you. Some companies have formal mentoring programs in which you can participate. Alternatively, you might find one or more mentors by approaching superiors you admire and offering to treat them to a coffee or lunch, so that you can ask questions about their career path and how they've succeeded. (Some career counselors advise not asking directly for someone to be your mentor, but instead to let such a relationship simply develop, by asking questions and working hard enough to get noticed.) Ideally, a mentor will offer guidance and honest feedback -- and, if they're in a position to do so, help you land better jobs.
If you're already well-positioned in your career path, consider seeking out promising younger folks who could use some good advice and support. Mentees, for their part, should listen well and be willing to hear some hard truths on occasion. Ideally, they should proactively drive conversations, not just await pearls of wisdom to be delivered on a platter.
Foolish Trivia
Name That Company
I trace my roots back to 1904, when a son of Italian immigrants founded the Bank of Italy in San Francisco, which morphed over time to become the world's largest commercial bank by the 1930s. I've gobbled up lots of companies, including credit card giant MBNA, U.S. Trust, FleetBoston Financial (which traced its roots to 1784) and even Merrill Lynch. Today, based in Charlotte, North Carolina, I sport a market value recently near $262 billion. I serve about 66 million customers via roughly 4,300 retail financial centers, and about 31 million customers bank with me using mobile devices. Who am I?
Last Week's Trivia Answer
I trace my roots back to the 1899 creation of the Electric Boat Company, which built the first practical submarine and sold it to the U.S. Navy. In 1954 it delivered the world's first nuclear-powered submarine. I was formed with my current name in 1952, through the merger of Electric Boat, Canadair and the Electro Dynamics Company. Today, based in Virginia with a market value recently near $43 billion, I rake in more than $38 billion annually. My offerings include IT services, combat vehicles, weapons systems and munitions. My businesses include Jet Aviation and Gulfstream. Who am I? (Answer: General Dynamics)
The Motley Fool Take
Cash and Carey
Diversified real estate investment trust (REIT) W.P. Carey (NYSE: WPC) was recently down 20% from its 52-week high, in part because of its exposure to sectors hit hard by COVID-19, such as retail and restaurants. But about 47% of its portfolio consists of industrial properties and warehouse spaces, some of which have enjoyed tailwinds from the pandemic-driven growth in e-commerce. The company's diversification has paid off. Also impressive, W.P. Carey collected 98% of the rent it billed in the third quarter.
W.P. Carey is a "net-lease" REIT. Essentially, it owns single-tenant properties, and its tenants are responsible for most of the operating costs of the assets they occupy. That's generally considered a fairly low-risk approach to owning real estate. Furthermore, W.P. Carey tends to buy properties directly in sale-leaseback transactions, finding companies that are looking to raise cash (to shore up their balance sheets or invest in growth) by selling properties they still want to occupy.
Long-term investors in W.P. Carey can profit from its solid business model and its hefty dividend, which recently yielded nearly 6% and has been increased annually for more than two decades. It has a strong performance history, and recently sported a reasonable valuation, with shares recently trading for around 15.5 times its cash flow per share
For those interested in real estate income, W.P. Carey is worth a closer look.
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