11-01-2014, 11:24 AM
This question really gets to the heart of dividend growth investing. While paying out a fixed percentage of earnings makes complete sense for the reasons others have mentioned, if you want a continually growing stream of dividends, it really puts the focus squarely on earnings. Dividends only grow if earnings grow.
Personally, I like a company that is committed to growing the dividend, and so long as earnings are generally growing over time, I don't mind at all that the payout ratio fluctuates so as to keep my dividend stream growing smoothly. That is, if earnings are growing, but in a "bumpy" way, I'd rather get a dividend that grows smoothly (via a fluctuating payout ratio) than a dividend that also bumps up and down with earning (in order to maintain a static payout ratio).
Personally, I like a company that is committed to growing the dividend, and so long as earnings are generally growing over time, I don't mind at all that the payout ratio fluctuates so as to keep my dividend stream growing smoothly. That is, if earnings are growing, but in a "bumpy" way, I'd rather get a dividend that grows smoothly (via a fluctuating payout ratio) than a dividend that also bumps up and down with earning (in order to maintain a static payout ratio).