Last week I told you Watsco (WSO) pays out 67% of its free cash flow and called it "comfortably boring."

Welp, fellow YouTuber and community member Kevin Burgess, who is a retired CPA, schooled me, and I want to share that with you.

First and most importantly, Watsco doesn't own everything on its own financial statements...

They run six joint ventures with Carrier — the company that makes most of the equipment they sell. Watsco owns 80% of five of them, 60% of the Canadian one. Carrier owns the rest.

Think of it like you own a food truck 80/20 with a friend. Truck brings in $1,000 on a Saturday. You didn't make $1,000. You made $800.

So here’s what Kevin shared:

The income statement handles this and has a line that literally says "less: net income attributable to non-controlling interest." That's Carrier's cut getting pulled out before earnings per share are calculated.

The cash flow statement doesn't. It shows all $1,000.

So the earnings payout ratio compares your dividend to your money.

The free cash flow payout ratio compares your dividend to everybody's money.

That's what I missed.

Here's 2025 run correctly, straight from the annual report:

Operating cash flow: $569.6M Minus capital spending: $34.6M Free cash flow: $535.1M

Minus the $132.2M paid out to Carrier: Free cash flow that's actually ours: $402.9M

They paid us $473.8M in dividends.

That's a 117.6% payout ratio. Not 67%.

To be fair to that 67% — it was the trailing twelve months. From the 2025 10K, full-year 2025 came in at 88.5% before adjusting for Carrier. Either way, I missed the Carrier adjustment.

Two important things:

That $132.2M covers two years. Carrier got nothing in 2024, so 2025 covered both. Normalize it to one year, and the payout lands right around 100%. Run the same math on 2024, and you get about 63%.

And, 2025 was the refrigerant transition — they flipped a billion dollars of inventory and ate the working capital (the money a business uses for daily operations) hit. Zero debt, $733 million in cash, and the dividend still came out of cash, not borrowed money.

So for Watsco, it’s more like comfortable in a normal year, stretched in a bad one, which is what the EPS payout ratio shows.

I'd gotten lazy and decided free cash flow was "the real number," and earnings were "the accounting number," and I stopped looking at half the story.

But look at what those two ratios were doing. Earnings payout ratio: 107% for the last twelve months. Free cash flow payout ratio: 67%. That huge gap needed investigating.

Actually, that gap is its own check engine light.

When both ratios line up, fine. When they're far apart, something structural is going on, and you need to go find out what. A joint venture? A big non-cash charge? Or something worse…

You only ever see that gap if you're looking at both.

So now I'm adding a step. Both payout ratios, every time. If there’s a big difference, grab a shovel because it’s time to go digging!

Big thanks to Kevin for replying instead of calling me an idiot and hitting delete. Go check out his channel — the guy knows his stuff, and he's genuinely a nice guy!

-Russ

Video I'm Watching

Newsletter reader Jim shared this video from John's Money Adventures and thought y'all might be interested in 5 dividend stocks at 52 week lows... One of them is Watsco (WSO).😎

Podcast I'm Listening To

Can You Retire With Just SCH...

Aug 19 · Mispriced

36:33

Our old friend Craig, aka "SCHD STAN" was on Eli's new podcast discussing if it's possible to retire with just SCHD. Always entertaining to hear Craig and for those of you who haven't yet, you can put a face to the Dividendology voice.

Disclaimer: This is not investment advice. Do your own research before making any investment decisions.

😁THANK YOU to all who responded to the last newsletter!!

Check out the portfolio on Blossom, the podcast, or see what’s cooking on YouTube.

And now, here is this week's portfolio activity...

Dividends Received This Week ~$0

None.

Dividends Received 2026 (Schwab Only)~

$3,205.04

Stocks Sold (AVERAGE)

The following sales were to pay for the replacement of our 22 year old roof. While it's painful to see McDonald's go, I view it as temporary. And, this was in our "overflow" taxable account and when I got home today, how nice it was to see a brand new roof, with a ridgeline vent as opposed to bigger numbers on a screen. One day Micky D's will be in the portfolio again!

11 McDonald's (MCD) | $268.70
200 Portillo's (PTLO) | $4.78
54 Schwab International Dividend ETF (SCHY) | $33.11

Stocks Bought (AVERAGE)

1 Agree Realty (ADC) | $73.90
1 Watsco (WSO) | $312.50

💰 GOING EX-DIVIDEND THIS WEEK 💰

8/24 Tractor Supply (TSCO), 2.74% | 68S
8/25 Johnson & Johnson (JNJ), 1.98% | 99VS
8/26 S&P Global (SPGI), 0.90% | 99VS
8/28 Badger Meter (BMI), 1.34% | 94VS
8/28 NextEra Energy (NEE), 2.98% | 80S

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In case you missed it, it's been three years since we talked with Shaun from Florida, and he's back to tell us why he's not buying any more big dividend yields...

🎶Random music from the Dapper Dividends Jukebox🎶

The Stray Cats - Rumble in Brighton