Top 10 Dividend Champions: Lowest Payout Ratios

The payout ratio is an often discussed metric for determining whether a dividend payer is a solid investment.  This is particularly true from a dividend growth perspective.

The premise of the argument is that a company paying most of its earnings in dividends doesn’t have room to increase its dividend payment going forward.  For instance, if a firm has net earnings of $3 per share per year and pays out $2.70 of those earnings in dividends, a 90% payout ratio, it has only $0.30 per year with which to increase dividend payments.

Danger?

Accordingly, investors should seek firms with low payout ratios.  Those firms have room to increase their dividends without consuming most of their earnings in the process.  The theory says investors are likely to see the dividend stream from that investment grow over time given the headroom afforded by the low payout ratio.

With that perspective in mind, the firms in the table below are the Top 10 Dividend Champions by Payout Ratio on 1.31.19.  All deliver 25+ year records of increasing dividend payments while carrying the lowest payout ratio among all Dividend Champions.

Company	Payout Ratio
Consolidated Edison	13.45
NACCO Industries	15.10
West Pharmaceutical Services	19.11
Black Hills Corp.	20.12
SEI Investments Company	20.95
Roper Technologies Inc.	21.07
Stepan Company	21.28
California Water Service	22.77
Nordson Corp.	23.18
Brown & Brown Inc.	23.19

Although this metric appears solid upon first glance, one should also look at the dividend yield.  It’s possible a firm with a low payout ratio is paying a low dividend as well.  A good exercise here would have been to drop another column to the right of the payout ratio in which to add the respective yields of the firms for comparison purposes.  Maybe next time.

Another item to keep in mind is that a firm with a low payout ratio and low dividend yield, ostensibly having room to grow its dividend, may never deliver a dividend stream as strong as that of an alternative firm already sporting a high dividend yield and high payout ratio.  See the post on Dividend Growth vs Dividend Yield for additional thoughts on this matter.

Buying a low payout ratio, low dividend stock might be considered the equivalent of paying several multiples above book value with the hope in both cases that actual results eventually meet expectations.  This can be a questionable proposition.  As a result, the Dividend Farmer prefers to buy a bird in hand rather than two in the bush.

In any event, looking for low payout ratio dividend payers is a popular screening method when hunting for dividend opportunities.  Your investing philosophy will help you determine whether or not emphasizing payout ratio is right for you.  Either way, it’s a metric to keep in mind when analyzing alternatives.

The thoughts and opinions expressed here are those of the author, who is not a financial professional.  Perspectives offered should not be considered investment advice.  They are presented for discussion and entertainment purposes only.  For specific investment advice or assistance, please contact a registered investment advisor, licensed broker, or other financial professional.