If you take a look at Chevron, it has a dividend per share of $4.28. Divide that by its reported EPS of $0.69 and you get a ratio of 6.2. This would concern me because the ratio is way over 1.0 and, in my opinion, puts the dividend in the realm of nonsustainability. Of course, energy prices have risen in the second quarter and Chevron may have adjusted its costs enough to raise its earnings, but we'll just have to wait for the next earnings call to find out.
Then you take a look at Apple, which has a rock-bottom dividend payout ratio of 0.25. Yes, Apple's fortunes could take a dramatic turn for the worse, but based on this ratio, it has a heck of a lot of runway before it would need to resort to cutting its dividend.
I like to see a dividend payout ratio under 0.8, because I feel it gives a company enough wiggle room to maintain the dividend if its earnings fall a little. A ratio below 0.5, I feel, would actually give a company enough room to possibly raise its dividend sometime down the road.
— By Mitch Goldberg, president of ClientFirst Strategy
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