US companies paying out more than they earn cut their dividend 2.5 times as often

Look up almost any dividend share and you will see its payout ratio: the part of the company's earnings that goes out as dividends. The usual advice is that a lower ratio is safer, and that a company paying out more than it earns cannot keep doing it for long.

We tested that on ten years of US data. Companies paying out more than 100% of their earnings cut their dividend within 12 months 20.2% of the time. Companies paying out 60% or less cut 8.2% of the time.

What we tested

We took every US-listed company worth at least $2bn and looked at it every six months from 2015 to 2024. Each company on each date counts as one observation. On each date we sorted the companies by payout ratio, using the earnings and dividends of the past year as they stood on that day.

We compared two groups. One paid out more than 100% of its earnings. The other paid out 60% or less, the upper end of the range many dividend guides call comfortable. Companies in between were left out of the comparison.

For every observation we checked whether the company paid less in dividends over the next 12 months than over the 12 months before, by more than 2%. One-off special dividends were left out on both sides. We dropped the three observation dates whose following year ran through the pandemic dividend suspensions, and 1,191 observations whose yield data failed our checks.

The test was written down before it ran, along with the size of effect the payout warning would need to show: 10 percentage points. It is test 3 in our list of every strategy we have tested.

What we found

Those rates come from 2,131 observations of companies paying out more than they earned and 9,862 of companies paying out 60% or less. The gap is 12.0 percentage points, which makes a cut 2.5 times as likely.

The gap showed up in both halves of the decade, and it held when we relaxed the data checks. Allowing for chance, we are 90% confident the true gap lies between 9.1 and 13.7 points. That range is well clear of zero. Its lower end falls just below the 10 points we set as the bar before running the test, so the true gap could be a little smaller than that bar.

What it means for your income

Take James, a hypothetical investor in his forties who holds US dividend shares in a stocks and shares ISA. Say that at any point in our test he had owned some companies of each kind and held them for a year.

On these numbers, about one in five of the companies paying out more than they earned would have cut. Among the companies paying out 60% or less, about one in twelve would have. The typical high-payout company still raised its dividend, by a median of 3.4%. The typical low-payout company raised it by 8.2%.

So the high-payout companies were far more likely to cut, and the ones that kept paying raised their dividends more slowly.

What this test does not tell you

• Returns. It measured dividends. A share can cut and still be a good buy if the price had already fallen to reflect it. Total returns need a separate test.
• Loss-making companies. A company that lost money has no payout ratio in our data, so it sits in neither group. Some of the most fragile dividends are paid by companies in that position.
• One bad year. A payout ratio uses one year of earnings. A one-off charge can push a healthy company over 100% for a year without putting its dividend at risk.
• Takeovers. A company that is bought out stops paying, and that counts as a cut here. Of the observations counted as cuts, 89 in the high-payout group and 236 in the low-payout group had no share price a year later.
• US only. The test used US companies, with dividends measured in dollars. We have not yet run the UK version, which UK investors usually describe as dividend cover.

The method note lists every exclusion and lets you download the data behind the chart.

How to use this before you buy

When a dividend share's payout ratio is above 100%, find out why. Check whether earnings fell for a one-off reason, whether free cash flow covers the dividend even when earnings do not, and whether debt is rising to fund the payment. The Dividend Safety Score checks each of these for a company.

Frequently asked questions

What is a dividend payout ratio?

The share of a company's earnings it pays out as dividends. A company that earns $1 a share and pays 50 cents is paying out half its earnings. Above 100%, it is paying out more than it earned, and the difference has to come from cash in the bank, borrowing or selling assets.

Does a payout ratio over 100% mean a dividend cut is coming?

Not for certain, but it raises the odds a lot. In our test of US companies worth at least $2bn from 2015 to 2024, those paying out more than 100% of earnings cut their dividend within 12 months 20.2% of the time. Those paying out 60% or less cut 8.2% of the time.

What payout ratio is too high?

There is no single line, and some businesses run high payouts by design. But in our data the companies paying out more than they earned were 2.5 times as likely to cut as those paying out 60% or less, so a payout above 100% is worth checking before you buy.

The takeaway

Between 2015 and 2024, large US companies paying out more than they earned cut their dividend within a year 20.2% of the time, against 8.2% for those paying out 60% or less.

If a dividend share you hold pays out more than it earns, find out why before you count on that income.

This is research on past data, not financial advice. Past dividends say nothing certain about future ones, and your own circumstances matter.