Investopedia

Do you consider yourself middle class?

Reviewed by Ebony Howard
Fact checked by Suzanne Kvilhaug

Most Americans consider themselves to be members of the middle class, regardless of how much money they make. Being middle class is a part of the American national identity, more a state of mind than a level of wealth. But if being middle class isn’t based on income, what is it based on? Lifestyle benchmarks may provide a better definition. These six can help you assess whether or not you are in the middle class.

Key Takeaways

• There is no official financial standard that defines the middle class, but there are certain benchmarks that seem to attest to that classification.
• Owning a home and a car, as well as being able to pay for your children to go to college are among the milestones.
• Being able to tuck away enough money for your retirement is significant, as is the ability to obtain healthcare for yourself and your family.
• Having enough disposable income to take your family on vacation is another benchmark.

Do You Consider Yourself Middle Class?

A wide variety of numbers have been thrown around in an effort to define the middle class. Add to this that how Americans view middle class, in terms of income, varies widely.

According to a Northwestern Mutual Planning and Progress Study, in 2018 68% of Americans identified themselves as middle class. A majority (78%) believed that annual incomes under $100,000 qualified as middle class, 52% believed the range was between $50,000 and $99,999, and 26% thought it was less than $50,000.

More recently, a 2024 Gallup poll found that 54% of Americans consider themselves middle class. The percentage had been 61% from 2002 through 2006 before it dropped during the Great Recession; it has averaged 53% since then. Also, more people now identify as working class or lower class than they did pre-recession: 45% vs. 36%.

Note

In Maryland, Massachusetts, Utah, and the District of Columbia, you could earn over $200,000 a year and still be considered middle class.

6 Signs You Are Middle Class

While there is no official financial standard, the middle class as defined by the the Middle Class Task Force formed under the Obama Administration characterized this segment of the U.S. population in terms of six financial aspirations that still hold true. We can view them as benchmarks. If you can check off each of these six points, you are likely a member of the middle class:

1. Home Ownership

Owning a home remains the American dream. The step up from renting to owning signifies prosperity and achievement. With median home price ranges differing by so much in different cities across the United States, the ability to achieve this goal varies significantly by geographical location.

2. Owning a Car

Owning a car provides freedom of movement and the luxury of avoiding the limited schedules and cramped quarters offered by mass transportation options, such as buses and subways. Here again, the cost of cars varies widely, as does the kind of automobile required. For one driver, a used Jeep will do the trick. For another, a new BMW signifies the achievement of this goal.

3. A College Education for the Kids

Helping their children get ahead in life is a primary goal for middle-class families. Paying for a college education for kids can cost anywhere from the low tens of thousands of dollars to hundreds of thousands. The university or college those children attend has a significant impact on the price tag.

4. Retirement Security

Retirement is a goal nearly everyone wants to achieve. It demonstrates success and provides a reward for decades of hard work. Once again, definitions make a difference. The amount of savings required to support your later years will vary significantly depending on whether you contemplate a staff of 10 at your villa in the South of France or a townhouse in Peoria, Illinois.

5. Healthcare Coverage

The ability to obtain healthcare is an important goal for middle-class wage earners and their families. The high and rising cost of medical care and prescription drugs make healthcare coverage an ever-increasing need; going without it can have serious negative financial implications in the event of a severe illness or injury.

6. Family Vacation

The family vacation is a middle-class staple. Vacations demonstrate that a family has disposable income and has been successful enough to take time away from work to focus on leisure.

What Happened to the Dream?

About half (51%) of the U.S. population is part of the middle class, according to a report published by the Pew Research Center in May 2024. However, even that slim majority reflects a longer-term trend of a shrinking middle class compared to previous decades. According to Pew, the middle class has fallen behind on two key counts: Since 1970, the growth in income of the middle class has not kept pace with the growth in income of the upper class, and the share of total U.S. household income held by the middle class has plummeted from 62% to 43%.

Globalization and technological advances have contributed to the reversal in growth of the middle class. The manufacturing base in the United States changed, as good-paying jobs in factories and heavy industries went overseas to lower-paying markets and labor unions lost much of their ability to bargain for high wages and good benefits.

Later, white-collar jobs from accounting and data entry to reading medical images and answering telephones in call centers were also sent offshore. Many jobs that remained in the U.S. were eliminated by computers and other technological advancements that increased productivity.

To achieve or maintain a middle-class lifestyle, many households became two-income families. Achieving middle-class goals became more difficult as employers eliminated their defined-benefit pension plans, the cost of college education continued to rise, and the cost of healthcare jumped.

How to Get There

Although there are significant challenges to obtaining middle-class status, there are some proactive steps that can help make the dream a reality. Budgeting is one of the most obvious. Understanding where your money goes each month can help you determine the exact makeup of the benchmarks you are trying to match. It can also help you control spending: Will that Jeep, not a BMW, be sufficient?

Even if you don’t have the means to invest for current income, you can take a few dollars from each paycheck and save for your retirement.

Planning is another crucial step. Are the kids going to a state university or a private college? Are scholarships an option?

Working is another one of the requirements. A second job or a side business might be what it takes to boost your income and achieve some of your goals. Putting your money to work is also an important consideration. Investing has helped build wealth for generations.

How Much Do You Have to Earn to Be Considered Middle Class?

There is disagreement about what income you have to earn in order to be in the middle class. However, the Pew Research Center, among others, consider those with an income that is two-thirds to double the U.S. median household income to be members of the middle class. In 2022 (the most recent data available), the income range was about $56,600 to $169,800.

What Are Signs That You’re in the Middle Class?

A few of the benchmarks of belonging to the middle class include owning a home and a car, being able to afford to put a child through college, and having adequate savings to retire.

Has the Middle Class Been Shrinking?

Yes. Between 1971 and 2023, the share of Americans living in middle class households shrank from 61% to 51%, according to an analysis of government data by the Pew Research Center.

The Bottom Line

For most people, what constitutes the middle class is less about literal earnings than it is about a standard of living—including owning a home, being able to afford to pay for a college education for your kids, and having enough disposable income to take a family vacation.

While numerous studies have outlined the decline of the middle class, for now, this demographic still includes about half of the households in the U.S.

Fact checked by Vikki Velasquez

After a divorce, child support payments are an important means of financial support. Understanding how child support works and how it is calculated is essential to both parents.

“Child support is financial assistance that one parent provides to the other to help cover the costs of raising a child after a divorce or separation,” says Matthew Dolan, founding partner at Dolan Divorce Lawyers. “How child support is calculated differs from state to state; however, it generally considers factors such as the terms of the parenting plan, the income of the parents, the number of minor children, child care costs that either party may incur, as well as medical expenses associated with the children.”

Key Takeaways

• Child support is money one parent pays to the other to assist with the costs of raising a child.
• Child support lasts until the child graduates high school or reaches the age of 18.
• Failing to pay child support has serious consequences, including wage garnishment, suspension of a driver’s license, and jail time.

What is a key concept about child support that is important to understand?

“You generally need to understand that the child support amount depends (on) which parent has primary physical custody of the child, along with the income and expenses of each parent,” Dolan says.

Key Child Support Terms

What child support terms are important to know?

Lucia Ramirez Levias, partner at DuBois Levias Law Group, offers these four key definitions:

• Child support order: A legal document issued by the court that outlines the financial responsibilities of each parent
• Mutual agreement: The ideal scenario where both parents agree on child support terms before presenting them to the court
• Mediation: A process where a neutral third party helps parents negotiate child support terms, often reducing legal costs and conflict
• Court determination: If parents cannot agree, a judge will decide on child support terms based on financial documents and legal guidelines.

Lewis Landerholm, founding partner of Pacific Cascade Legal, says divorcing parents also need to understand the difference between obligor and obligee and gross income and net income.

“The obligor is the parent who is ordered to pay the child support, while the obligee is the parent who receives child support,” Landerholm explains. “It’s also important to understand the difference between gross income and net income. Gross income is a person’s total income, before taxes and deductions, and is a key factor in calculating child support. Net income is your take-home pay—the amount of income after taxes and deductions.”

What If You Don’t Pay Child Support?

What happens if you are late or skip child support payments?

“Late or skipped child support payments can have serious consequences,” says Marina Shepelsky, managing partner at Shepelsky Law Group. “These may include wage garnishment, interception of tax refunds, suspension of driver’s or professional licenses, and even jail time. It’s important to stay current with payments to avoid these penalties.”

When Will Child Support Payments Finish?

How long do child support payments continue?

“Child support payments typically continue until the child reaches the age of 18 or graduates from high school, whichever is later. In some cases, payments may continue if the child has special needs or if the parents agree to extend support for college expenses,” Shepelsky says.

Divorce is a challenging time for all families. Establishing child support payments is just one of the key factors in a divorce.

“If you’re going through a divorce proceeding, remember: Be patient. Keep your eye on the prize,” Shepelsky says. “Some divorces take years to complete! There may be a lot of issues to resolve, from custody, parenting plan, and visitations to the complex financial issues of child support. Find a solution that sets your children up safely and securely, including their finances and emotional well-being.”

The Bottom Line

Divorce is a difficult time, and child support payments are important financial components. With child support payments, one parent pays financial assistance to the other parent for the upbringing of a child. Child support is based on a number of factors, including both parents’ gross incomes, the costs of raising a child, and a child’s medical expenses.

Child support payments last until the child turns 18 or graduates from high school. Some parents choose to extend child support payments to help meet college expenses. Having a special needs child is another reason why parents may choose to extend child support payments.

Fact checked by Vikki Velasquez

Social Security is an essential means of financial support for many older Americans. With so many baby boomers receiving Social Security payments, will there be enough money in the program for future generations?

Key Takeaways

• Social Security provides financial support to retired Americans and Americans with disabilities.
• The baby boomer generation is so large that it is putting a strain on Social Security.
• Raising the retirement age and raising Social Security taxes are two ways to address this growing demand for benefits.
• Some Americans are nervous about proposed changes to Social Security by the Trump administration, but supporters see the changes as making Social Security more efficient.

Changes Needed

The Social Security trust fund will be able to pay 100% of benefits until 2033 and then will only be able to pay 79% of benefits. Changes to Social Security will be needed within the next few years to bolster the program’s funds.

“The number of beneficiaries compared to the number of workers will increase over the next decade. There will have to be some changes with the way Social Security will work,” says Chuck Czajka, a certified Social Security claiming strategist and founder of Macro Money Concepts.

Those changes could include raising the retirement age or raising Social Security taxes.

“One potential solution is to raise the retirement age to age 70. Boomers are working longer, which has helped Social Security funds from being depleted,” Czajka says. “Adjustments will have to be made, like increasing the taxes or raising the retirement age. I believe these changes can shore up Social Security for future generations.”

Job Cut and Retirement Age Concerns

Plenty of people are nervous about the changes to Social Security that the Trump administration may be proposing, including slashing jobs at Social Security.

“With Trump and the Department of Government Efficiency (DOGE) making swift cuts to the program and decreasing the workforce, beneficiaries will begin to have a delayed retirement process and not get the customer service they need,” says Colin Ruggiero, co-founder of DisabilityGuidance.org. “The Social Security Administration (SSA) is already overwhelmed as it is, so processing claims with a reduced workforce could be catastrophic. If there is a delay in benefits for those who collect them, millions will be affected financially. There are over one million disability claims that have yet to be processed, and beneficiaries are racking up debt to make ends meet.”

Ruggiero isn’t alone in his concerns. About 51% of surveyed adults are worried that the Trump administration could make changes to Social Security that would negatively affect them, and 60% of adults believe the Trump administration will attempt to raise the retirement age for Social Security, according to Taylor Shuman, an editor at SeniorLiving.org.

But Czajka doesn’t see the potential changes as negatives for Social Security.

“The Trump administration’s recent moves could actually benefit the Social Security trust fund,” Czajka says. “Social Security will be made more efficient.”

The Bottom Line

To meet the growing demands of the baby boomer generation, a change will have to be made to Social Security, whether it is lifting the retirement age to 70 or raising Social Security taxes. So while baby boomers haven’t drained Social Security completely, the number of baby boomers collecting Social Security is a challenge.

Whether changes are made during the Trump administration or a future administration remains to be seen. In the meantime, Social Security will continue to provide a vital financial lifeline to millions of Americans.

Fact checked by Suzanne Kvilhaug

If your new job comes with a pension, you may wish to roll over the retirement savings you have in a 401(k) plan from an old employer into your pension. While there’s much to like about having a pension, there are several factors you must consider to determine if this option is right for you.

“A pension provides predictable, lifetime income, which can be emotionally and financially reassuring. Studies have shown that retirees with guaranteed income sources experience lower stress and greater happiness than those relying solely on market-driven withdrawals,” says John Abernethy, a certified financial planner at Together Planning.

Key Takeaways

• Before you rollover a 401(k) into a pension plan, evaluate the financial stability of the company in charge of the pension.
• Check to see if the pension allows for cost-of-living adjustments. Ideally, the plan should have them.
• Understand that once money from a 401(k) is rolled over into a pension, you won’t be able to access the money ahead of retirement.

Is It Smart to Roll Over a 401(k) Into a Pension?

It may feel good to have a pension, but does rolling over retirement savings from a 401(k) plan into a pension make financial sense?

“Whether rolling over a 401(k) into a pension is a good idea depends on several factors, including the financial health of the pension provider, whether the pension offers a cost-of-living adjustment (COLA), and the retiree’s need for guaranteed income,” Abernethy says. “Pensions that do not include a COLA expose retirees to inflation risk, as their purchasing power declines over time.”

In contrast, healthy returns from a 401(k) plan may do a good job of outpacing inflation.

“A 401(k) invested in a balanced stock-and-bond portfolio has historically provided returns that outpace inflation, allowing retirees to maintain their standard of living,” Abernethy says.

Checking the Financial Stability of a Pension

Review the financial health of the company managing the pension before moving money from a 401(k).

“Unlike a 401(k), which remains under the retiree’s control, pension benefits depend on the solvency of the plan sponsor. If the pension plan is underfunded or poorly managed, there’s a risk of reduced benefits,” Abernethy says. “While some private pensions are insured by the Pension Benefit Guaranty Corporation (PBGC), coverage is limited, making it essential for retirees to assess the long-term viability of the pension before making a rollover decision.”

You can check if a pension plan is insured under the Pension Benefit Guaranty Corporation (PBGC) by visiting its website. In addition to reviewing its insurance, you should also check the financial stability of the managing company and the pension itself.

“To evaluate the company’s financial health, you can review its balance sheet, cash flow, and profitability metrics from publicly available financial statements. If it’s a publicly traded company, you can check its 10-K filing on the SEC’s EDGAR database,” Abernethy says. “You would look for signs of financial stability like strong cash reserves, manageable debt levels, and consistent earnings. A financially stable company is more likely to meet its pension obligations.”

Where do you go to uncover information on a pension?

“The best place to look is the Form 5500 Annual Return/Report of Employee Benefit Plan, which provides key details on the plan’s financial health,” Abernethy says. “The most relevant metric is Line 14: “Funding Target Attainment Percentage,” which compares the plan’s assets to its liabilities.” The higher the percentage, the better funded the plan.

Financial Control vs. Stability

In a 401(k) plan, you have control over your investments, but you give up this control when you move your 401(k) savings to a pension.

“When you convert your 401(k) into a defined benefit pension, you trade flexibility for security. With a pension, your accumulated savings are transformed into a predictable, often lifelong income stream. This structure shifts the investment risk away from you, providing a guaranteed retirement benefit,” says Scott Van Den Berg, a certified financial planner at Century Management Financial Advisors. “However, this stability comes at a cost: you lose much of the control you might have over your investments. Once funds are moved into a pension, you typically cannot borrow against them or access them early.”

Steps to Roll Over a 401(k) Into a Pension

What steps do you need to take to roll over a 401(k) into a pension?

“If a pension plan allows rollovers from a 401(k), the process typically involves confirming eligibility, reviewing payout options, evaluating the financial strength of the pension provider, and comparing financial projections,” Abernethy says. “It’s important to analyze whether expected pension payments align with long-term income needs and whether a 401(k) would provide greater flexibility and control. If moving forward, funds are usually transferred directly from the 401(k) to the pension to avoid tax consequences.”

The Bottom Line

If you have a pension, adding the retirement savings from a 401(k) may seem like a great idea. After all, pensions can provide steady, guaranteed benefits for the life of the pensioner. Before you roll over your 401(k), check the financial standing of the company managing the pension. If the company is not in good shape, you may receive reduced benefits. Also, consider what you are giving up. With a 401(k) plan, you have control of your investments, and you sacrifice this control when your money moves into a pension.

WACC is important for both investors and companies

Reviewed by Samantha Silberstein
Fact checked by Vikki Velasquez

There is no specific formula in Excel or other spreadsheet applications that will calculate a company’s weighted average cost of capital (WACC) for you. Instead, the sheet must be populated with data from the company’s published financial statements and other sources, then manipulated with different formulas to arrive at its WACC.

Key Takeaways

• The weighted average cost of capital (WACC) is a financial metric that reveals a firm’s total cost of capital. 
• To calculate WACC in Excel, you’ll need to gather data from financial statements and public sources.
• Excel spreadsheets must be built and multiple formulas used to calculate a company’s WACC, as there is no specific formula that can be entered.

Build the Excel Sheet

First, enter the following data into cells on the spreadsheet:

• Cost of Debt: 2.50%
• Tax Rate: 21.00%
• Debt as % of Total Capital: —
• After Tax Cost of Debt: —

• Risk-Free Rate: 2.40%
• Beta: 1.16
• Equity Risk Premium (ERP): 6.00%
• Equity as % of Total Capital: —
• Cost of Equity: —

• Cash & Cash Equivalents, ST & LT & Marketable Securities: $27,854,000,000.00
• Long Term Debt: $31,265,000,000.00
• Net Debt: —
• Total Capital: —

• Net Diluted Shares Outstanding: 471,425,000.00
• Current Share Price: $74.69
• Equity Value: —

It should resemble the following image:

Enter the Formulas

Next, enter the formulas (shown to the right of the arrows) in the following image, which also include cells that show where data should come from:

Calculate WACC

Next, add the following section to the bottom of the sheet and enter:

• Debt as % of Total Capital (Debt>Weight)
• Equity as % of Total Capital (Equity>Weight)
• After Tax Cost of Debt (Debt>Cost)
• Cost of Equity (Equity>Cost)

You multiply debt cost and weight, and add it to the product of equity cost and weight, as shown in this image:

You should now have an Excel spreadsheet that has calculated this company’s WACC:

High WACC vs. Low WACC

Each WACC is high or low depending on the industry. Some sectors, like start-up technology companies, depend on raising capital via stock, while other sectors, like real estate, have collateral to solicit lower-cost debt.

High WACC calculations mean a company is being charged more for the financing it has received. This often means the company is riskier, as lenders charge higher interest or investors require higher returns for the risk they’re taking on. Low WACC calculations mean the company may be more stable, established, or safer: investors and creditors charge less for funds.

How Do You Calculate WACC In Excel?

There are several steps needed to calculate a company’s WACC in Excel. You’ll need to gather information from its financial reports, some data from public vendors, build a spreadsheet, and enter formulas.

What’s The Formula for Calculating WACC?

There are several formulas floating around the internet, but they all calculate the same elements:

WACC = ( % Proportion of Equity * Cost of Equity ) + ( % Proportion of Debt * Cost of Debt * (1 – Tax Rate ) )

How Do You Calculate Average Weighted Price In Excel?

You can enter the prices in column X, and enter each price’s weight in the next one, column Y. Use the formula =SUMPRODUCT(X1:X10, Y1:Y10)/SUM(Y1:Y10) to calculate the average weighted price.

The Bottom Line

Weighted Average Cost of Capital is a metric that shows the cost of a company’s capital. Calculating WACC in Excel takes several steps, but it isn’t too complicated other than determining some of the values to use.

Fact checked by Betsy Petrick

Roth IRAs are just one type of popular individual retirement account (IRA), the other being traditional IRAs. Unlike a traditional IRA, which is funded with tax-deferred contributions, a Roth IRA is funded with contributions made on an after-tax basis or through a 529 rollover (after 2024). Because of this, Roth IRAs are considered to be tax-advantaged, and there are strict contribution limits based on income level. Every year, these contributions and income levels can be adjusted, so it’s important to learn how much you can fund your account.

Key Takeaways

• Roth IRAs are funded with income that you’ve already paid taxes on.
• Individuals are only allowed to contribute up to $7,000 (or $8,000 if over 50 years old) for tax years 2024 and 2025.
• If your earnings exceed the income limit, you are not allowed to contribute to a Roth IRA.

Roth IRA Contribution Limits for Tax Year 2025

You can fund a Roth IRA up to your contribution limit until tax filing day of the following year. For instance, you can fund your Roth through April 15, 2025, and the contributions will count toward your 2024 limit. However, if you file your taxes before the deadline, the contributions you make after that point count toward the next year’s limit. Keep in mind if you file an extension on your taxes, you don’t get additional time to fund your Roth.

For 2024 and 2025, the IRS announced the full Roth IRA contribution limit is $7,000. People 50 years old and over can contribute an additional $1,000 if they meet income qualifications.

Roth IRA Contribution Limits for 2024 and 2025
Married and filing jointly (or qualifying widow(er))
You are single, head of household, or married, filing separately (but you didn’t live with your spouse at any time during the last year)
Filing Status	Contribution Limit
	$7,000 ($8,000 if age 50 or older)
	$7,000 ($8,000 if age 50 or older)

Roth IRA Phase-out Ranges

Not everyone can contribute to a Roth IRA since the IRS places income limitations on these accounts. Every year, the IRS publishes the phase-out ranges for contributing. These income limits are based on your modified adjusted gross income (MAGI) and tax-filing status. If you’re in the phase-out range, you can make partial contributions but not the maximum limit for the year.

To determine your MAGI, you can look at your adjusted gross income (AGI) and add the deductions that might have been taken out. Look at the income phase-out ranges below to see if you can make full or reduced contributions to your Roth IRA.

For example, if you’re a single filer and you make less than $150,000 MAGI in 2025, you can contribute the full amount. If you make $155,000, you can contribute a partial amount, and if you earn more than $165,000, you are ineligible for a Roth IRA.

Roth IRA Phase-out Ranges for 2024 and 2025
Married and filing jointly (or qualifying widow(er))
Married, filing separately (but you lived with your spouse at any time during the last year)
You are single, head of household, or married, filing separately (and you didn’t live with your spouse at any time during the last year)
Filing Status	2024 MAGI	2025 MAGI	Contribution Limit
	Less than $230,000	Less than $236,000	$7,000 ($8,000 if age 50 or older)
	$230,000 to $240,000	$236,000 to $246,000	Begin to phase out
	$240,000 or more	$246,000 or more	Ineligible for direct Roth IRA
	Less than $10,000	Less than $10,000	Begin to phase out
	$10,000 or more	$10,000 or more	Ineligible for direct Roth IRA
	Less than $146,000	Less than $150,000	$7,000 ($8,000 if age 50 or older)
	$146,000 to $161,000	$150,000 to $165,000	Begin to phase out
	$161,000 or more	$165,000 or more	Ineligible for direct Roth IRA

Roth IRA Catch-up Contributions

In a perfect world, you might be able to fund your Roth IRA to the maximum limit every single year, which could really help your retirement fund grow. Unfortunately, there are probably years that you missed out on funding your Roth to the max or contributing to it at all.

If you’re 50 or older, you can contribute more to your Roth IRA in an attempt to catch up a little. Usually, the IRS allows you to contribute an extra $1,000 each tax year in catch-up contributions if you’re eligible.

Note

You can usually find the updated contributions and phaseout ranges for the following year around the fourth quarter of the current year.

Withdrawing From a Roth IRA

With a Roth IRA, you can withdraw your contributions at any time. You don’t have to wait until retirement, and you’re not required to take minimum distributions once you reach retirement age. This is because you’ve already paid tax on the contributions, and it’s up to you what to do with the money in the account. That said, you can’t withdraw the earnings until you’re at least 59 ½ and you’ve owned the account for at least five years.

For example, someone who is 58 years old couldn’t withdraw their earnings but could withdraw earnings and contributions if they became disabled or was a first-time homebuyer. Once they reach 59 ½, they could withdraw funds penalty-free for any reason.

Those under 59 ½ or people who haven’t held their Roth IRA for at least five years do have the option of withdrawing earnings, but they’ll face a 10% penalty.

Important

Because of the Tax Cuts and Jobs Act (TCJA) of 2017, you can no longer convert your Roth IRA to and from another type of tax-advantaged account through recharacterization. Any loan conversions after 0ct. 15, 2018, cannot be recharacterized.

The Bottom Line

Contributing to a Roth IRA can be a smart strategy to save for retirement, but you’ve got to know the limits and withdrawal rules so you’re not hit with a surprise penalty. Fortunately, since you’ve already paid taxes on your contributions, you have more flexibility with the account before you retire. And, unlike traditional IRAs, you’re not required to take out minimum distribution payments, so you could leave the account to your heirs.

A Roth IRA is a beneficial retirement planning tool, and there are several reasons why you may want to implement it into your financial strategy. While there is no up-front tax break for investing in a Roth IRA, once you invest, you get the benefit of tax-free growth and tax-free withdrawals, when done properly, which can be especially advantageous if you end up in a higher tax bracket during retirement.

To open a Roth IRA account, you must first determine your eligibility. Next, you need to choose a Roth IRA provider, gather the necessary documentation, and decide which investments to include. Finally, you need to schedule your contributions.

Key Takeaways

• Roth IRAs provide the benefit of tax-free growth: The money you invest is left over from income on which you paid tax, so you do not get a tax deduction for Roth IRA contributions. But once the money is invested, you get the advantage of tax-free growth. Depending on how early you start and the types of investments you use in your Roth, the compounding effects over time can generate substantial gains.  
• You can withdraw Roth IRA contributions tax-free at any time and age. Furthermore, you can withdraw Roth IRA earnings tax-free after you’ve owned that or any other Roth IRA for at least five years and you reach age 59½. Tax-free withdrawals in retirement can be especially beneficial to any Roth IRA account owner who ends up in a higher tax bracket than they were in pre-retirement.
• You are never required to take a distribution from your Roth IRA. Investing in a Roth can also be a great estate planning tool. Not only are required minimum distributions (RMDs) not required, but you can pass along the account tax-free to your beneficiaries someday. RMD rules do apply to any heirs, but their withdrawals would be tax-free. 

How to Open a Roth IRA

Step 1: Determine Your Eligibility

For the 2025 tax year, the modified adjusted gross income (MAGI) limit for Roth IRA contributions has increased. The amount you can contribute to a Roth IRA is limited or potentially phased out in the following tax filing situations:

• Married filing jointly or qualifying surviving spouse, with a modified AGI of at least $236,000 (up from $230,000 in 2024). You can’t make a Roth IRA contribution if your modified AGI is $246,000 (up from $240,000 in 2024) or more.
• Single, head of household, or married filing separately, and you didn’t live with your spouse at any time in 2025, and your modified AGI is at least $150,000 (up from $146,000 in 2024). You can’t make a Roth IRA contribution if your modified AGI is $165,000 (up from $161,000 in 2024) or more.
• Married filing separately is the same for 2025 as it was for 2024—you lived with your spouse at any time during the year, and your modified AGI is greater than $0. You can’t make a Roth IRA contribution if your modified AGI is $10,000 or more.

Income Limits for Roth IRA in 2024 and 2025

Filing Status	2024 Modified AGI	2025 Modified AGI	Contribution Limit
Married filing jointly or qualifying surviving spouse	Less than $230,000	Less than $236,000	Up to $7,000 (under age 50) Up to $8,000  (age 50 and over)
Married filing jointly or qualifying surviving Spouse	At least $230,000	At least $236,000	Reduced amount
Married filing jointly or qualifying surviving spouse	$240,000 or greater	$246,000 or greater	$0
Single, head of household, or married filing separately	At least $146,000	At least $150,000	Reduced amount
Single, head of household, or married filing separately	$161,000 or greater	$165,000 or greater	$0
Married filing separately (lived with spouse at any time during the year)	Greater than $0	Greater than $0	Reduced amount
Married filing separately (lived with spouse at any time during the year)	At least $10,000	At least $10,000	$0

Step 2: Choose a Roth IRA Provider

When deciding which brokerage is right for you, it is important to take a holistic look at the financial institution, including aspects such as:

• Fees: Are there yearly maintenance fees? Are there additional fees for trading investments within the Roth IRA? Are there additional fees for advice from a financial advisor?
• Investment options: Does the brokerage offer the types of investments that you are looking for—stocks, bonds, mutual funds, ETFs, alternative investment options?
• Customer service: What are the hours of customer service? Are questions answered by telephone, email, or online chat?
• Additional services: Does the brokerage offer other types of accounts that you may be interested in to help reach your financial goals, such as custodial accounts, educational savings accounts, or even banking options?
• Account amenities: Would you have access to planners, educational materials, or the ability to connect outside accounts to get an aggregate financial picture?

Best Roth IRA Brokers

Company	Fees	Account Minimum
Fidelity	$0 for stock/ETF trades, $0 plus $0.65/contract for options trades	$0
Charles Schwab	$0 for stock/ETF trades, $0.65 per contract for options	$0
Wealthfront	0.25% for most accounts; no trading commission or fees for withdrawals, minimums, or transfers	$500

Step 3: Gather the Necessary Documentation

To open a Roth IRA or any type of investment account, you need certain documents and information. 

• Identification, such as a driver’s license or state- or government-issued identification
• Social Security number
• Beneficiary information—it is important to have up-to-date beneficiary information on any account or asset that you have so that the person or people you intend will get the proceeds from the account upon your death and any tax benefit that may go along with that inheritance.
• Bank details to fund your account and feed any ongoing, automated contributions that you arrange

Step 4: Decide Which Investments to Include

As with any retirement account, you should choose investments in your Roth IRA that align with your risk threshold and financial goals. Because investments in your Roth IRA enjoy tax-free growth and tax-free withdrawal (when executed according to various rules, investments that have the potential to notch the most gains or generate high dividends are, generally speaking,  good choices. However, these types of investments should only be a part of your asset allocation if they also meet your risk tolerance and retirement timeline. 

Your risk tolerance indicates how much risk you are willing to take. 

• Higher-risk investments include growth-oriented stocks, stock mutual funds, and ETFs.
• Lower-risk investments include bonds, dividend stocks, income funds, money market accounts, and money market funds

Your retirement timeline also affects how aggressively you may want to invest. If you are relatively close to retirement, you may choose lower-risk investments to protect your principal amount, as you don’t have as much time to recover from unexpected drops in the market. If you have a few decades until you retire, holding higher-risk investments can lead to potentially higher returns over time while also giving you sufficient time to rebound from market pullbacks.

Step 5: Schedule Your Contributions

There are a few ways that you can invest in your Roth IRA account:

• Set up automatic investments from your bank or employer: A predetermined amount goes directly from your bank account or paycheck to your Roth account at set intervals until you have reached your maximum contribution level.
• Contribute on a yearly basis: Use money from a source such as an annual bonus or your tax refund to fund your Roth IRA each year.

It is also important to remember that a Roth IRA offers tax-free growth and tax-free withdrawals when done properly, so the younger you are when you start investing in a Roth IRA, the longer you have to take advantage of the compounding effects of the tax-free growth.

The Bottom Line

Regardless of what tax bracket you find yourself in during retirement, investing in a Roth IRA has perks. You do not get any immediate tax deductions for contributing to this type of account, but you do enjoy tax-free growth on your investments and, generally, tax-free withdrawals. If you find that you don’t want or need to take any withdrawals from your Roth IRA, then you can use it as an estate planning tool to pass assets to your named beneficiaries.

Reviewed by Charlene Rhinehart
Fact checked by Yarilet Perez

What Is Going Private?

A public company may choose to go private for several reasons. There are a number of short- and long-term effects to consider when going private, as well as a variety of advantages and disadvantages.

Here’s a look at the variables that companies must consider before deciding to go private.

Key Takeaways

• Going private means that a company does not have to comply with costly and time-consuming regulatory requirements, such as the Sarbanes-Oxley Act of 2002.
• In a “take-private” transaction, a private equity group purchases or acquires the stock of a publicly traded corporation.
• Private companies also do not have to meet Wall Street’s quarterly earnings expectations.
• With fewer requirements, private companies have more resources to devote to research and development, capital expenditures, and the funding of pensions.

Understanding a Public Company

There are advantages to being a public company. For example, the buying and selling of public company shares is a relatively straightforward transaction and a focus of investors seeking a liquid asset. There is also a certain degree of prestige to being a publicly traded company, implying a level of operational and financial size and success, particularly if the stock trades on a major market like the New York Stock Exchange.

However, there are also tremendous regulatory, administrative, financial reporting, and corporate governance bylaws to which public companies must comply. These activities can shift management’s focus away from operating and growing a company and toward adherence to government regulations.

For instance, the Sarbanes-Oxley (SOX) Act of 2002 imposes many compliance and administrative rules on public companies. A by-product of the Enron and WorldCom corporate failures in 2001 and 2002, respectively, SOX requires all levels of publicly traded companies to implement and execute internal controls. The most contentious part of SOX is Section 404, which requires the implementation, documentation, and testing of internal controls over financial reporting at all levels of the organization.

Public companies must also conduct operational, accounting, and financial engineering to meet Wall Street’s quarterly earnings expectations. This short-term focus on the quarterly earnings report, which is dictated by external analysts, can reduce prioritization of longer-term functions and goals such as research and development, capital expenditures, and the funding of pensions. In an attempt to manipulate the financial statements, a few public companies have shortchanged their employees’ pension funds while projecting overly optimistic anticipated returns on pension investments.

What It Means to Go Private

A “take-private” transaction means that a large private equity group, or a consortium of private equity firms, purchases or acquires the stock of a publicly traded corporation. Due to the large size of most public companies, which have annual revenues of several hundred million to several billion dollars, it is normally not feasible for an acquiring company to finance the purchase single-handedly. The acquiring private equity group typically needs to secure financing from an investment bank or related lender that can provide enough loans to help finance (and complete) the deal. The newly acquired target’s operating cash flow can then be used to pay off the debt that was used to make the acquisition possible.

Equity groups also need to provide sufficient returns for their shareholders. Leveraging a company reduces the amount of equity needed to fund an acquisition and increases the returns on capital deployed. Put another way, leveraging means the acquisition group borrows someone else’s money to buy the company, pays the interest on that loan with the cash generated from the newly purchased company, and eventually pays off the loan balance with a portion of the company’s appreciation in value. The rest of the cash flow and appreciation in value can be returned to investors as income and capital gains on their investment (after the private equity firm takes its cut of the management fees).

Once an acquisition is agreed to, management typically lays out its business plan to prospective shareholders. This go-forward prospectus covers the company and industry outlook and sets forth a strategy showing how the company will provide returns for its investors.

When market conditions make credit readily available, more private equity firms can borrow the funds needed to acquire a public company. When credit markets tighten, debt becomes more expensive, and there will usually be fewer “take-private” transactions.

Deciding to Go Private

Investment banks, financial intermediaries, and senior management often build relationships with private equity firms to explore partnership and transaction opportunities. As acquirers typically pay at least a 20% to 40% premium over the current stock price, they can entice CEOs and other managers of public companies—who are often heavily compensated when their company’s stock appreciates in value—to go private. In addition, shareholders—particularly those who have voting rights—often pressure the board of directors and senior management to complete a pending deal to increase the value of their equity holdings. Many stockholders of public companies are also short-term institutional and retail investors, and realizing premiums from a “take-private” transaction is a low-risk way of securing returns.

When considering whether to consummate a deal with a private equity investor, the public company’s senior leadership team must also balance short-term considerations with the company’s long-term outlook. In particular, they must decide:

• Does taking on a financial partner make sense for the long term?
• How much leverage will be tacked onto the company?
• Will cash flow from operations support the new interest payments?
• What is the future outlook for the company and industry?
• Are these outlooks overly optimistic, or are they realistic?

Management needs to scrutinize the track record of the proposed acquirer. Among the criteria to consider:

• Is the acquirer aggressive in leveraging a newly acquired company?
• How familiar is the acquirer with the industry?
• Does the acquirer have sound projections?
• Does the acquirer have hands-on investors, or will it give management leeway in the company’s stewardship?
• What is the acquirer’s exit strategy?

Advantages of Privatization

Going private, or privatization, frees up management’s time and effort to concentrate on running and growing a business, as there is no requirement to comply with SOX. Thus, the senior leadership team can focus more on improving the business’s competitive positioning in the marketplace. Internal and external assurance, legal professionals, and consulting professionals can work on reporting requirements for private investors.

Private equity firms have varying exit timelines for their investments, but holding periods are typically four to eight years. This horizon frees up management’s prioritization to meet quarterly earnings expectations and allows management to focus on activities that can create and build long-term shareholder wealth. For instance, managers might choose to retrain the sales staff and get rid of underperformers. The extra time and money that private companies enjoy once they’re free of reporting obligations can also be used for other purposes, such as implementing a process improvement initiative throughout the organization.

Disadvantages of Privatization

A private equity firm that adds too much leverage to a public company to fund the deal can seriously impair an organization if adverse conditions occur. For example, the economy could take a dive, the industry could face stiff competition from overseas, or the company’s operators could miss important revenue milestones.

If a privatized company has difficulty servicing its debt, its bonds can be reclassified from investment-grade bonds to junk bonds. This will make it harder for the company to raise debt or equity capital to fund capital expenditures, expansion, or research and development. Healthy levels of capital expenditures and research and development are often critical to the long-term success of a company as it seeks to differentiate its product and service offerings and make its position in the marketplace more competitive. High levels of debt can, thus, prevent a company from obtaining competitive advantages in this regard.

Obviously, private company shares don’t trade on public exchanges. In fact, the liquidity of investors’ holdings in a privatized company varies depending on how much of a market the private equity firm wants to take—that is, how willing it is to buy out investors who want to sell. In some cases, private investors may easily find a buyer for their portion of the equity stake in the company. However, if the privacy covenants specify exit dates, it can make it challenging to sell the investment.

Pros

• Management can concentrate on running and growing the business.

• Management can prioritize meeting quarterly earnings expectations.

• Management can focus on creating and building long-term shareholder wealth.

Cons

• Adverse conditions could impair the company if too much leverage funded the deal.

• High levels of debt can prevent the company from obtaining competitive advantages.

• Privacy covenants with specified exit dates can make it challenging for private investors to sell their investment.

What Are Some of the Best-Known Public Companies to Go Private?

Among the best-known public companies to go private are X (formerly Twitter), Heinz (which went public again as The Kraft Heinz Company (KHC)), Panera Bread, and Reader’s Digest.

What Is the Largest ‘Take-Private’ Deal in History?

Dell Technologies spent $67 billion to acquire EMC Corp., forming the world’s largest privately controlled tech company in 2016. Dell went public again (DELL) two years later.

Can a Private Company Go Public?

Yes, a privately held company can decide to go public. The process involves several important and sensitive steps that protect the company and potential investors, including selling shares for the first time, otherwise known as an initial public offering (IPO).

The Bottom Line

Going private is an attractive and viable alternative for many public companies. Being acquired can create significant financial gain for shareholders and CEOs, while fewer regulatory and reporting requirements for private companies can free up time and money to focus on long-term goals.

As long as debt levels are reasonable, and the company continues to maintain or grow its free cash flow, operating and running a private company frees up management’s time and energy from compliance requirements and short-term earnings management and may provide long-term benefits to the company and its shareholders.

Reviewed by Ebony Howard
Fact checked by Vikki Velasquez

The Youth Advantage

If you’re a young investor, you face a bewildering array of investment options. But whatever your choices are, time is on your side. Your long time horizon allows you to exploit the power of compounding to meet your financial goals.

You probably have several goals in mind: You need to build a small nest egg to deal with emergencies. You want to invest in the medium term for big purchases like a home. You want to start the process of building wealth for your retirement years way down the road.

Here are some solid suggestions for dealing with all of those goals.

Key Takeaways

• Young investors have the most valuable resource on their side: time.
• Compound interest and dividend reinvestment are proven tools for maximizing long-term investing.
• Buying your own home is a solid investment choice if you plan to stay in it for longer than five years.
• Company 401(k) plans are excellent choices, especially if your employer offers a matching contribution.
• If you’re self-employed, IRAs open up a huge range of investment choices.

Saving for Retirement

If you’re young, your greatest financial assets are time⁠ and compound interest. Early on, your primary investment objective for long-term savings should be growth. With 40 years or so to go before retirement, you can afford to take reasonable risks.

Consider focusing on equities such as stocks and stock mutual funds or exchange-traded funds (ETFs)⁠. You might also consider real estate, either in the form of a personal residence or a real estate investment trust (REIT), a mutual fund that invests in real estate holdings.

Above all, make a plan and stick to it. As your income rises, increase the amount you put away for the future.

Important

Real estate and stocks both tend to outpace inflation over time. Real estate values rarely grow as quickly as stock prices but they experience fewer booms and busts.

401(k)s and IRAs

If you have a full-time job, you probably have access to a 401(k) retirement plan. If you are self-employed, you can invest in an Individual Retirement Account (IRA).

Both come with immediate tax benefits and the potential for serious wealth accumulation over time.

Retirement Plan Choices

Employer-sponsored retirement plans can come with a voluntary contribution by your employer. This might be, for example, a 50% match on the first 5% of your contributions. That can result in tens of thousands of extra dollars in your pocket at retirement.

If you’re self-employed, you can open an individual retirement account (IRA).

The benefits of an employer-sponsored 401(k) and an IRA are similar:

• If you choose a traditional account, the amount you contribute each year is tax-free that year. You won’t pay taxes on the money until you withdraw it, presumably after you retire.
• If you choose a Roth account, you’ll pay income taxes on the money you contribute in that year but the entire account will be tax free when you withdraw it.

Traditional or Roth?

Most financial experts advise younger people to use a Roth account. All of those years of growth should result in a bigger pile of non-taxed income when you retire.

Ultimately, the Roth account’s tax-free growth makes it unbeatable over time. Since you pay income taxes on the money when you pay it in, it’s a little more pain now for a lot more gain over time.

Not all employers offer a Roth alternative with their 401(k) plans.

IRAs, traditional and Roth, are available at most banks and other financial institutions.

Investing

You’re not going to want to put every spare penny into an account you can’t use for 40 or more years. If you’re saving for a down payment on a house, or any other shorter-term goal, you can do better than stashing your money in a savings account that barely matches the inflation rate.

Investing in exchange-traded funds (ETFs) that mimic the holdings in a benchmark like the S&P 500 Index is one good option.

You can choose an ETF with a mix of stocks across industries, giving you a diverse portfolio without a huge outlay of cash. The fees are lower than you’ll pay for a managed mutual fund.

Moreover, if you allow the dividends and interest to accumulate, you can reach your financial goal in a few years rather than a few decades.

Index-linked ETFs typically outperform risky strategies like individual stock-picking or day trading, especially over time.

Buying a Home

Traditional financial wisdom dictates that a house is one of the best long-term investments. but your returns depend on several variables. The duration of your residence and the state of the housing market at the time you buy and sell are big factors, as are current interest rates and comparable rental prices in your town.

It’s probably cheaper to rent in most cases if you plan on living in the home for less than five years. It usually takes at least five to seven years to accumulate enough equity in a home to justify buying one rather than renting.

Saving for College

There are several savings vehicles to consider for your money if you’re still trying to get through school or haven’t started yet.

529 Plans

Nearly every state has this type of college savings plan. The funds can be allocated among various investment choices and will grow tax-free until they’re withdrawn to pay tuition and other higher education expenses.

The contribution limits for these plans vary from state to state but are generally quite high.

If you’re struggling to get near your college savings goal you should know that parents and grandparents can also contribute to your plan, and enjoy some tax benefits.

Coverdell Education Savings Accounts

This type of college savings account is another option for those who want to take a self-directed approach to their investments. This is a federal program that allows tax-free distribution of the accumulated funds.

The annual contribution limit as of 2024 is $2,000 per beneficiary per year. That’s not much, given the current cost of tuition, but it can be helpful, especially if you want to purchase a specific investment that’s not offered inside a 529 Plan.

U.S. Savings Bonds

Savings bonds are worth considering if you want to keep your money safe. The interest earned on U.S. Savings Bonds is tax-free if it’s used for higher education expenses. The returns are modest but this is the gold standard of safe investing.

Short-Term Investments

The alternatives for your short-term cash are pretty much the same regardless of your age.

Money market funds, savings accounts, and short-term certificates of deposit (CDs) provide safety and liquidity for your idle cash.

The amount you keep in these investments will depend on your financial situation but most experts recommend keeping enough to cover at least three to six months of living expenses in an emergency fund.

What Are the Easiest Investments for Young People?

Exchange-traded funds (ETFs) and mutual funds are a way to keep pace with the overall growth of the stock market. It’s less risky than picking stocks on your own.

That said, the popularity of ETFs has led to the creation of highly specialized funds that track everything from gold prices to video game companies.

The more popular and less risky ETFs track benchmarks like the S&P 500 Index, the Nasdaq 100, and the total stock market.

Why Should You Start Investing When You’re Still Young?

It’s said that the only true miracle is compound interest. Young people may earn less money but investing in your 20s will give your savings several decades to grow.

Tax-advantaged retirement accounts give you even more reason to start young.

What Are the Best Short-Term Investments for Young People?

Investing is a challenge for younger people because they tend to have little disposable income and big first-time expenses. The interest paid on regular savings accounts is insignificant.

Your better bet is short-term investments such as money market funds and certificates of deposit (CDs). You’ll get a slightly better return and still be able to access your money at relatively short notice.

The Bottom Line

The most important financial step you can take is to start young. Where you invest matters less than the decision to invest regularly. The right investments for you will depend largely upon your personal investment objectives, risk tolerance, and time horizon.

Reviewed by Khadija Khartit
Fact checked by Suzanne Kvilhaug

Dividend Stock Ratios

Dividend stock ratios are used by investors and analysts to evaluate the dividends a company might pay out in the future. Dividend payouts depend on many factors such as a company’s debt load; its cash flow; its earnings; its strategic plans and the capital needed for them; its dividend payout history; and its dividend policy. The four most popular ratios are the dividend payout ratio; dividend coverage ratio; free cash flow to equity (FCFE) ratio; and net debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio.

Mature companies no longer in the growth stage may choose to pay dividends to their shareholders. A dividend is a cash distribution of a company’s earnings to its shareholders, which is declared by the company’s board of directors. A company may also issue dividends in the form of stock or other assets. Generally, dividend rates are quoted in terms of dollars per share, or they may be quoted in terms of a percentage of the stock’s current market price per share, which is known as the dividend yield.

Key Takeaways

• Dividend stock ratios are an indicator of a company’s ability to pay dividends to its shareholders in the future.
• The four most popular ratios are the dividend payout ratio, dividend coverage ratio, free cash flow to equity ratio, and net debt to EBITDA ratio.
• A low dividend payout ratio is considered preferable to a high dividend ratio because the latter may indicate that a company could struggle to maintain dividend payouts over the long term.
• Investors should use a combination of ratios to evaluate dividend stocks.

Understanding Dividend Stock Ratios

Some stocks have higher yields, which may be very attractive to income investors. Under normal market conditions, a stock that offers a dividend yield greater than that of the U.S. 10-year Treasury yield is considered a high-yielding stock. As of March 28, 2025, the U.S. 10-year Treasury yield was 4.27%. Therefore, any company that had a trailing 12-month dividend yield or forward dividend yield greater than 4.27% was considered a high-yielding stock.

However, prior to investing in stocks that offer high dividend yields, investors should analyze whether the dividends are sustainable for a long period. Investors who are focused on dividend-paying stocks should evaluate the quality of the dividends by analyzing the dividend payout ratio, dividend coverage ratio, free cash flow to equity (FCFE) ratio, and net debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio.

Important

Income investors should check whether a high-yielding stock can maintain its performance over the long term by analyzing various dividend ratios.

Dividend Payout Ratio

The dividend payout ratio may be calculated as annual dividends per share (DPS) divided by earnings per share (EPS) or total dividends divided by net income. The dividend payout ratio indicates the portion of a company’s annual earnings per share that the organization is paying in the form of cash dividends per share. Cash dividends per share may also be interpreted as the percentage of net income that is being paid out in the form of cash dividends.

Generally, a company that pays out less than 50% of its earnings in the form of dividends is considered stable, and the company has the potential to raise its earnings over the long term. However, a company that pays out more than 50% may not raise its dividends as much as a company with a lower dividend payout ratio. Additionally, companies with high dividend payout ratios may have trouble maintaining their dividends over the long term.

When evaluating a company’s dividend payout ratio, investors should only compare a company’s dividend payout ratio with its industry average or similar companies.

Dividend Coverage Ratio

The dividend coverage ratio is calculated by dividing a company’s annual EPS by its annual DPS or dividing its net income less required dividend payments to preferred shareholders by its dividends applicable to common stockholders.

The dividend coverage ratio indicates the number of times a company could pay dividends to its common shareholders using its net income over a specified fiscal period. Generally, a higher dividend coverage ratio is more favorable.

While the dividend coverage ratio and the dividend payout ratio are reliable measures to evaluate dividend stocks, investors should also evaluate the free cash flow to equity (FCFE) ratio.

Free Cash Flow to Equity (FCFE) Ratio

The FCFE ratio measures the amount of cash that could be paid out to shareholders after all expenses and debts have been paid. The FCFE is calculated by subtracting net capital expenditures, debt repayment, and change in net working capital from net income and adding net debt.

Investors typically want to see that a company’s dividend payments are paid in full by FCFE.

Net Debt to EBITDA Ratio

The net debt to EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio is calculated by dividing a company’s total liability less cash and cash equivalents by its EBITDA. The net debt to EBITDA ratio measures a company’s leverage and its ability to meet its debt.

Generally, a company with a lower ratio, when measured against its industry average or similar companies, is more attractive. If a dividend-paying company has a high net debt to EBITDA ratio that has been increasing over multiple periods, the ratio indicates that the company may cut its dividend in the future.

Fast Fact

A company that pays out more than 50% of its earnings in the form of dividends may not raise its dividends as much as a company with a lower dividend payout ratio. Thus, investors prefer a company that pays out less of its earnings in the form of dividends.

What Is a Dividend Payout Ratio?

A dividend payout ratio is the total amount of dividends that a company pays to shareholders relative to its net income. Put simply, it’s the percentage of earnings paid to shareholders via dividends. The amount not paid to shareholders is retained by the company to pay off debt or to reinvest in its core operations.

A dividend payout ratio is also known as a payout ratio.

What Is a Dividend Coverage Ratio?

A dividend coverage ratio measures the number of times that a company can pay dividends to its common shareholders using its net income over a specified fiscal period.

The dividend coverage ratio is also known as the dividend cover.

What Is a Free Cash Flow to Equity (FCFE) Ratio?

A free cash flow to equity (FCFE) ratio measures how much cash is available to a company’s equity shareholders after all expenses, reinvestment, and debt are paid. FCFE is a measure of equity capital usage and is often used by analysts to try to determine the value of a company.

What Is a Net Debt to Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) Ratio?

A net debt to EBITDA ratio measures leverage, calculated as a company’s interest-bearing liabilities minus cash or cash equivalents, divided by its EBITDA. It’s a debt ratio that shows how many years it would take for a company to pay back its debt if net debt and EBITDA are held constant. However, if a company has more cash than debt, the ratio can be negative.

The Bottom Line

Each ratio provides valuable insights as to a stock’s ability to meet dividend payouts. However, investors who seek to evaluate dividend stocks should not use just one ratio because there could be other factors that indicate the company may cut its dividend. Investors should use a combination of ratios, such as those outlined above, to better evaluate dividend stocks.