Glossary
Dividend Payout Ratio
The share of a company's earnings paid out as dividends; a ratio above 100% means it pays more than it earns.
The dividend payout ratio tells you how much of a company's profit goes back to shareholders as dividends. A payout ratio of 40% means the company distributes 40 cents of every dollar it earns and keeps the other 60 cents to reinvest, repay debt or buy back stock. It is one of the first numbers investors check when asking whether a dividend can be sustained.
Worked example
Reading it in context
What counts as normal varies by industry. Fast-growing companies often pay nothing because they reinvest everything. Mature consumer and healthcare companies often pay out 40% to 70%. Utilities and telecoms with stable cash flows commonly run higher. Real estate investment trusts must distribute at least 90% of their taxable income to keep their tax status, so their ratios on reported earnings can look alarmingly high.
Better versions of the ratio
Earnings can be distorted by non-cash charges such as write-downs and Depreciation. Many analysts therefore also compute a cash payout ratio: dividends divided by Free cash flow (FCF). For REITs, a ratio based on funds from operations is standard. A payout ratio above 100% for one bad year is not automatically a red flag; several years in a row usually is.