Payout Ratio, Free Cash Flow, and Dividend Safety

Free cash flow is the money a company has after paying for operations and capital expenses, but before paying out dividends. It is typically better to compare dividend amounts to free cash flow, since it tells you how much money a company has to reinvest.

For example, if a company is making $100 million but has $95 million in expenses, it would have a free cash flow of only $5 million. This would heavily limit its growth, despite the company having a large revenue.

Source: RGcocpa