Dividend Payout Ratio
The share of earnings paid out as dividends. A low ratio leaves room to grow the dividend; a very high one signals fragility.
Formula
Payout Ratio = Dividends Per Share ÷ Earnings Per Share
The dividend payout ratio measures what fraction of a company's net income is returned to shareholders as dividends, rather than retained to reinvest in the business. It is a primary gauge of how sustainable a dividend is.
A low payout ratio (say 20–40%) means earnings comfortably cover the dividend with a wide buffer and room to grow it. A ratio approaching or exceeding 100% means the company is paying out more than it earns — funding the dividend from cash reserves or debt, which is rarely sustainable and often precedes a cut. The right level is sector-dependent: utilities and REITs structurally run high payouts, while growth companies retain most earnings.
Because reported net income can be distorted by one-off charges, many analysts prefer the cash payout ratio — dividends divided by free cash flow — which ties the payout to actual cash generated rather than accrual accounting. The retained portion (1 − payout ratio) is the retention ratio that funds future growth.
Example
A company earns $4.00 EPS and pays $1.40 in annual dividends per share. Payout ratio = $1.40 ÷ $4.00 = 35%. That leaves 65% of earnings retained — a healthy buffer that could absorb an earnings dip without forcing a dividend cut.
Related Terms
Dividend
A cash (or stock) payment a company makes to shareholders from its profits, typically on a quarterly schedule.
BeginnerDividend Yield
Annual dividend per share divided by stock price, expressed as a percentage. Shows income return relative to current price.
BeginnerEPS (Earnings Per Share)
Net income divided by shares outstanding. EPS is the single most-watched earnings metric for valuing a stock.
BeginnerFree Cash Flow
Operating cash flow minus capital expenditures. The actual cash a business generates after maintaining and growing its assets.
IntermediateReturn on Equity (ROE)
Net income as a percentage of shareholders' equity. Measures how efficiently a company turns shareholder capital into profit.
Intermediate