When evaluating companies for hi-yields (i.e.) high dividends look for companies with high “Payout Ratio”.

Payout Ratio is a ratio of how much the company is paying out in dividends each year based on its earnings. It is calculated by dividing the dividends paid per share in year by Earnings Per Share (EPS). Put another way, it is the amount of profits that a company pays out.

Lets say a company had an EPS of $4 in a year and it paid $2 in dividends annually.
The payout ratio is $2/$4 = 50%. Banks, Utilities usually have payout ratios of 30% to 40% or even higher.

Why is Payout Ratio important?
This is important because it cannot be “faked”. Dividends are paid out of profits and it is very difficult for a company to manipulate numbers and tell shareholders that it made a profit.
When a company pays good dividends it usually means it earned it.