UK companies paying out more than they earn cut their dividend nearly twice as often

A payout ratio above 100% means a company paid out more in dividends than it earned. Most dividend guides treat it as a red flag. We had already tested that warning on US companies, and it held. We have now run the same test on UK companies.

Between 2015 and 2024, large UK companies paying out more than they earned cut their dividend within 12 months 21.9% of the time. Companies paying out 60% or less cut 11.4% of the time.

What we tested

We took every UK-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 worked out its payout ratio from 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, which UK investors would call dividend cover below 1. The other paid out 60% or less. Companies in between were left out, and so were loss-making companies, because a company with no earnings has no payout ratio.

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 395 observations whose yield data failed our checks.

The groups, thresholds and checks were copied from the US test, with only the market changed. That was written down before the test ran, along with the size of effect the warning would need to show: 10 percentage points. It is test 6 in our list of every strategy we have tested.

What we found

The rates come from 215 observations of companies paying out more than they earned and 949 of companies paying out 60% or less. The gap is 10.5 percentage points, and a cut was 1.9 times as likely in the high-payout group.

The gap appeared in both halves of the decade, larger in the second half than the first, and it held when we relaxed the data checks. Allowing for chance, we are 90% confident the true gap lies between 5.3 and 16.2 points. That range is well clear of zero. Its lower end is below the 10 points we set as the bar, so the true gap could be smaller than that.

The high-payout group is small. On a typical date only about a dozen large UK companies were paying out more than they earned, which is why the range is wider here than in the US test.

How the UK compares with the US

In the US test, companies paying out more than they earned cut 20.2% of the time, and those paying out 60% or less cut 8.2% of the time. The UK high-payout group cut at about the same rate as its US counterpart. The UK low-payout group cut more often than the US one, at 11.4% against 8.2%, so the UK gap is a little narrower.

What it means for your income

Take Tom, a hypothetical investor in his fifties who holds UK 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.

About one in five of his high-payout holdings would have cut, against about one in nine of the low-payout ones. Counting cuts and rises together, the typical high-payout company raised its dividend by a median of 1.9%. The typical low-payout company raised it by 5.8%.

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.
• 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, none in the high-payout group and 7 in the low-payout group had no share price a year later.

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

How to check a high payout before you buy

When a UK dividend share pays out more than it earns, find out why. Check whether earnings fell for a one-off reason, whether free cash flow covers the dividend when earnings do not, and whether debt is rising to fund it. The Dividend Safety Score checks each of these for a company.

Frequently asked questions

What does a payout ratio over 100% mean?

The company paid out more in dividends than it earned over the year. The difference has to come from cash it already holds, from borrowing or from selling assets. In UK terms it is the same as dividend cover below 1.

Do UK companies paying out more than they earn cut their dividend?

More often than others. In our test of UK companies worth at least $2bn from 2015 to 2024, those paying out more than 100% of earnings cut their dividend within 12 months 21.9% of the time. Those paying out 60% or less cut 11.4% of the time.

Is the UK result the same as the US one?

The pattern is the same. Large US companies paying out more than they earned cut 20.2% of the time, against 8.2% for those paying out 60% or less. UK companies cut more often in both groups, so the UK gap was a little smaller.

The takeaway

Between 2015 and 2024, large UK companies paying out more than they earned cut their dividend within a year 21.9% of the time, against 11.4% for those paying out 60% or less.

If a UK share you hold for income pays out more than it earns, find out how it is funding the dividend.

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