Dividend Payout Ratio

Loading the player...

What is the 'Dividend Payout Ratio'

The dividend payout ratio is the percentage of earnings paid to shareholders in dividends.

Calculated as:

Dividend Payout Ratio

BREAKING DOWN 'Dividend Payout Ratio'

The dividend payout ratio provides an indication of how much money a company is returning to shareholders, versus how much money it is keeping on hand to reinvest in growth, pay off debt or add to cash reserves. This latter portion is known as retained earnings.

How to Interpret the Ratio

A number of considerations go into interpreting the dividend payout ratio, most importantly the company's level of maturity. A new, growth-oriented company that aims to expand, develop new products and move into new markets would be expected to reinvest most or all of its earnings and could be forgiven for having a low or even zero payout ratio.

On the other hand, an older, established company that returns a pittance to shareholders would test investors' patience and could tempt activists to intervene. Apple (AAPL) began to pay a dividend for the first time in nearly twenty years in 2012, when the new CEO felt the company's enormous cash flow made a 0% payout ratio difficult to justify. Because it implies that a company has moved past its initial growth stage, a high payout ratio means share prices are unlikely to appreciate rapidly.

The payout ratio is also useful for assessing a dividend's sustainability. Companies are extremely reluctant to cut dividends, since it can drive the stock price down and reflect poorly on the management's abilities. If a company's payout ratio is over 100%, it is returning more money to shareholders than it is earning and will probably be forced to lower the dividend or stop paying it altogether. That result is not inevitable, however. A company can weather a bad year without suspending payouts, and it is often in their interest to do so. It is therefore important to consider future earnings expectations and calculate a forward-looking payout ratio to contextualize the backward-looking one.

Long-term trends in the payout ratio also matter. A steadily rising ratio could indicate a healthy, maturing business, but a spiking one could mean the dividend is heading into unsustainable territory.

Dividends Are Industry Specific

Dividend payouts vary widely by industry, and like most ratios, they are most useful to compare within a given industry. REITs​, for example, are legally obligated to distribute at least 90% of earnings to shareholders, as they enjoy special tax exemptions. MLPs​ tend to have high payout ratios as well. 

Dividends are not the only way companies can return value to shareholders, so the payout ratio does not always provide a complete picture. The augmented payout ratio incorporates share buybacks​ into the metric; it is calculated by adding dividends and buybacks and dividing the sum by net income for the same period. If the result is too high, it can indicate an emphasis on short-term boosts to share prices at the expense of reinvestment and long-term growth.

Another adjustment that can be made to provide a more accurate picture is to subtract preferred stock dividends, for companies that issue preferred shares.

 

RELATED TERMS
  1. Payout Ratio

    Payout ratio is the proportion of earnings paid out as dividends ...
  2. Target Payout Ratio

    A target payout ratio is a measure of what size a company's dividends ...
  3. Payout

    The expected financial return from an investment over a given ...
  4. Dividend

    A distribution of a portion of a company's earnings, decided ...
  5. Retention Ratio

    The proportion of earnings kept back in the business as retained ...
  6. Stock Dividend

    A dividend payment made in the form of additional shares, rather ...
Related Articles
  1. Investing Basics

    Corporate Dividend Payouts And the Retention Ratio

    An investor can use dividend payout and retention ratios to gauge an investment’s possible return, and compare it to other stocks.
  2. Forex Education

    Payout Ratio

    Investing is a complex and often daunting experience, these equations are actually quite simple.
  3. Markets

    Cash Flow Indicator Ratios: Dividend Payout Ratio

    By Richard Loth (Contact | Biography)This ratio identifies the percentage of earnings (net income) per common share allocated to paying cash dividends to shareholders. The dividend payout ratio ...
  4. Investing Basics

    Dividend Ratios: Payout And Retention

    The dividend payout ratio and retention ratio measure how much profit a company gives back to shareholders as dividends. When a business earns money, it must decide whether to use all of its ...
  5. Investing

    A Guide For Calculating The Dividend Payout Ratio

    Dividends are a significant contributor to total equity returns. That makes dividend payout ratios—which are key indicators of dividend sustainability—doubly important.
  6. Investing Basics

    6 Rules for Successful Dividend Investing

    Dividend investing is a smart way to build wealth but there are some important rules investors must remember in order to maximize value.
  7. Investing

    Dividend Payout Ratio

    Discover how this ratio can help you determine how well a company's earnings support its dividend payments.
  8. Economics

    Do Interest Rate Changes Affect Dividend Payers?

    Interest rate changes have an effect on prices of dividend-rich stocks in interest rate sensitive sectors like utilities, pipelines, telecommunications and REITs.
  9. Investing

    The 3 Biggest Misconceptions of Dividend Stocks

    To find the best dividend stocks, focus on total return, not yield.
  10. Markets

    Due Diligence On Dividends

    Understanding dividends and how they work will help you become a more informed and successful investor.
RELATED FAQS
  1. How do I calculate dividend payout ratio from a balance sheet?

    Understand what the dividend payout ratio indicates and learn how it can be calculated using the figures from a company's ... Read Answer >>
  2. What are some possible red flags in a company's dividend payout ratio?

    Read about how investors and analysts use the dividend payout ratio to scrutinize the sustainability of a company's dividend ... Read Answer >>
  3. What is the difference between the dividend yield and the dividend payout ratio?

    Learn the differences between a stock's dividend yield and its dividend payout ratio, and learn why the latter might be a ... Read Answer >>
  4. What is the difference between dividend yield and dividend payout ratio?

    Understand the difference between the dividend yield and the dividend payout ratio, two basic investment valuation measures ... Read Answer >>
  5. For what types of investments is the payout ratio the most relevant?

    Find out about the payout ratio, what the payout ratio measures and the type of investment that the payout ratio is used ... Read Answer >>
  6. Are dividend payout ratios different in different economic sectors?

    Discover which economic sectors have traditionally higher or lower dividend payout ratios and the various factors that determine ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center