Financial Thought of the Day August 28, 2014: Dividend Payout Ratio

When you see a company with a frothy dividend yield of say 4% you may want to check out its dividend sustainability. The best way do that is to see how much of its free cash flow a company pays out in dividends in a given full year. That way it won't get distorted by seasonal fluctuations. I consider a dividend sustainable if it pays out less than 50% of its free cash flow a year.