Payout Ratios

Q What's a "payout ratio"? — R.B., Hartford, Conn.

A It's the percentage of a company's earnings (net income) paid out to shareholders as a dividend. For example, McDonald's is expected to earn approximately $3.82 per share in fiscal 2009, and its annual dividend amount is currently $2. Divide $2 by $3.82 and you'll get 0.52, or a payout ratio of 52 percent.

High payout ratios leave companies with little flexibility regarding what they can do with their cash. That can be OK, if a firm is big and established and doesn't need to reinvest much in the business. Sometimes reinvested earnings would return less than shareholders could get investing the payout on their own.

Steep payout ratios can be red flags. If a company's ratio is 125 percent, for example, it will have to dig into reserves to pay its dividend,

something it can't keep up forever. It

may have to reduce its dividend.

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Q Do I need life insurance? — T.N., Reno, Nev.

A If you're young and debt-free, with no children and no house, you might consider skipping it — for now. Think of insurance as protection against a financial loss, not as an investment. (After all, there are more effective ways to invest.) If a spouse or children depend on your income, carrying insurance would be smart, to protect against income loss, should something happen to you. But if you don't need to protect any income stream, consider parking your money elsewhere. (Learn about better investment strategies at www.fool.com/investing/basics/ index.aspx.)

Still, do take some time to read up on insurance — at www.insweb.com and www.fool.com/insurance.

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