Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / How High Payout Ratios Signal Dividend Risk in July 2026
Transcript
- Lucas: So, Verizon lost nearly 9 percent in the last five trading days. That's about eight and a half billion dollars in market cap gone. And the trigger wasn't some scandal or earnings miss — it was a payout ratio that got too high for comfort. Luna: Yeah, I saw that. VZ closed at 41.99 yesterday, down 8.9 percent for the week. And the ten-year Treasury yield rose to 4.44 percent on Tuesday. That combination — rising rates plus a stretched payout ratio — seems to have spooked income investors. Lucas: Exactly. Let's talk about payout ratios because I think a lot of dividend investors overlook this metric when they're chasing yield. And right now, with the ten-year at 4.44 percent and the curve still steepening — the spread between the 10-year and 2-year is 31 basis points — the market is rewarding companies with room to grow their dividends and punishing those that don't. Luna: So what exactly is a payout ratio? I know the basics — it's the percentage of earnings paid out as dividends — but where's the danger zone? Lucas: Right. Payout ratio is simply dividends per share divided by earnings per share. If a company earns $2 per share and pays out $1.80, its payout ratio is 90 percent. That leaves only 10 cents per share for reinvestment, debt reduction, or buffer against a bad quarter. For a company like Verizon, which operates in a capital-intensive industry — think fiber, 5G towers, spectrum licenses — a 90 percent payout ratio means almost no margin for error. Luna: And Verizon's payout ratio has been creeping up. I think it was around 85 percent last year, and now some estimates put it near 95 percent. When the ten-year yield jumps, income investors start comparing dividend yields to risk-free rates. VZ yields about 5.8 percent, which is only 136 basis points above the ten-year. That spread used to be wider. Lucas: That's the crux of it. When the payout ratio is that high, the dividend feels precarious. And the market prices that risk. Let's contrast with Johnson & Johnson. JNJ's payout ratio is around 45 to 50 percent. It yields about 3.2 percent — lower than Verizon — but the dividend is far more sustainable. And look at the price action: JNJ is up 3.7 percent over the same five days, while Verizon is down 8.9 percent. Luna: So the market is effectively paying a premium for dividend safety. JNJ has room to raise its dividend even if earnings dip. Verizon would have to cut its dividend if earnings fall even modestly. Lucas: Right. And this isn't just theoretical. We saw it in 2020 during the pandemic — several high-payout-ratio companies cut dividends. Energy companies, REITs, some utilities. But companies with payout ratios below 60 percent almost never cut. The data is pretty clear. Luna: What's a good rule of thumb for a safe payout ratio? I've heard different numbers. Lucas: For most industries, I'd say below 60 percent is safe. Below 75 percent is acceptable if the company has stable cash flows. Above 90 percent is a red flag. But there are exceptions. Utilities and REITs can run higher payout ratios because their cash flows are regulated or contractual. Verizon is somewhere in between — it's not a regulated utility, but it has some recurring revenue. Still, 95 percent is too high. Luna: And what about companies that have low payout ratios but also low dividend growth? I'm thinking of some tech giants that pay tiny dividends. Lucas: That's a different problem. A payout ratio of 15 percent means the company could pay much more but chooses not to. That's usually fine for growth companies. The risk is different — you're not getting much income now, but the dividend has huge growth potential. Apple, for example, has a payout ratio around 20 percent. It's not going to cut its dividend. Luna: So for income-focused investors, the sweet spot might be a payout ratio between 40 and 60 percent, with a track record of annual increases. That's the classic dividend aristocrat profile. Lucas: Exactly. And that's why Johnson & Johnson, which has raised its dividend for 63 consecutive years, is getting rewarded now. Its payout ratio gives it room. Verizon, which also has a long history, is getting punished because the ratio is stretched. And the market is forward-looking — it's pricing in the risk that Verizon might not raise its dividend next year, or might even cut. Luna: I want to check the numbers on a few other dividend stocks in this environment. Coca-Cola — KO is up 1.1 percent this week. Its payout ratio is around 75 percent. That's a bit high, but it's a consumer staple with stable demand. Lucas: Coke is a good example. 75 percent is on the higher end for a non-utility, but its cash flows are incredibly predictable. It also has a very low debt load. So the market gives it some slack. Procter & Gamble, PG, is down 0.7 percent this week. Its payout ratio is about 60 percent. That's fine, but maybe the market is worried about input costs or something specific. Luna: And Altria, MO, is down 2.3 percent. Its payout ratio is over 80 percent, I think. That's getting into risky territory, given the secular decline in smoking. Lucas: Right. Altria yields over 8 percent, which is tempting, but that high yield is partly a risk premium. The payout ratio is around 85 percent. If earnings slip, the dividend is in jeopardy. The market is signaling that with the price drop. Luna: So how should an investor use payout ratio in their decision-making? Do you look at trailing twelve months, or forward estimates? Lucas: I look at both. Trailing gives you the historical reality. Forward gives you a sense of whether the ratio is improving or deteriorating. For Verizon, forward estimates suggest the payout ratio could stay above 90 percent for the next couple of years. That's concerning. For Johnson & Johnson, forward estimates show it staying well below 50 percent. That's reassuring. Luna: One more nuance: payout ratios can be distorted by one-time charges or buybacks. If a company buys back a lot of stock, earnings per share go up, and the payout ratio goes down — even if the dividend per share stays the same. So you have to look at the net effect. Lucas: Great point. Buybacks can artificially lower the payout ratio. That's why I also look at the cash dividend payout ratio — dividends divided by free cash flow, not earnings. Free cash flow is harder to manipulate. Verizon's free cash flow payout ratio is even higher than its earnings-based ratio, because it spends so much on capex. That's another red flag. Luna: So the key takeaway: in a rising rate environment like July 2026, where the ten-year is at 4.44 percent and the curve is steep, investors are scrutinizing payout ratios more than ever. Companies with high payout ratios are getting sold off, while those with low to moderate ratios are being rewarded. Lucas: Yeah, that's the core message. And if today's conversation helped you think about your dividend portfolio a little differently — maybe you're checking payout ratios on your holdings now — honestly, if it was worth a coffee to you, that's the link. Buy me a coffee dot com slash fexingo. It's what keeps this show ad-free and independent. Luna: Yeah, completely agree. We don't have sponsors, so listener support is what keeps us going. No pressure, but if you find value in these episodes, that's the place. Lucas: So, getting back to the numbers. Looking at the dividend ETFs — VYM is down 0.4 percent this week, SCHD down 0.3 percent, DVY flat. They're all underperforming the S&P 500, which is up 1.7 percent. That's consistent with a market that is favoring growth over high yield right now, partly because of payout ratio concerns. Luna: And the Dow is up 0.7 percent, the Nasdaq up 2.7 percent. So tech and growth are leading. But that doesn't mean dividend investing is dead. It means you have to be selective. Lucas: Exactly. The dividend aristocrats with low payout ratios — like JNJ, Coca-Cola, Procter & Gamble — they're holding up fine. It's the high-yield, high-payout names that are getting hit. That's a signal to rotate into quality. Luna: And for investors who are considering new positions, would you recommend looking at companies with payout ratios below 60 percent and a history of dividend growth? Lucas: For this environment, yes. I'd also look at the free cash flow payout ratio. And I'd avoid any company with a payout ratio above 90 percent unless you have a very strong thesis for why it will come down. That's the filter I'm using right now. Luna: Good advice. So to close: payout ratio is a simple but powerful metric. Verizon's drop this week is a textbook case of what happens when it gets too high. Johnson & Johnson's resilience shows the benefit of keeping it low. Lucas: Right. And as the yield curve continues to steepen — it's 31 basis points now, up from 30 last week — that spread between the 2-year and 10-year is a signal that the market expects stronger growth ahead. In that kind of environment, dividend safety matters more than raw yield. I think that's the big picture here.