Loading the player...

What is 'Dividend Payout Ratio'

The dividend payout ratio is the ratio of the total amount of dividends paid out to shareholders relative to the net income of the company. It is the percentage of earnings paid to shareholders in dividends. The amount that is not paid to shareholders is retained by the company to pay off debt or to reinvest in core operations.

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 it is keeping on hand to reinvest in growth, pay off debt, or add to cash reserves (retained earnings).  The dividend payout ratio can be calculated as the yearly dividend per share divided by the earnings per share, or equivalently, the dividends divided by net income (as shown below):

Dividend Payout Ratio Formula

Alternatively, the Dividend Payout Ratio can also be calculated as 1 - Retention Ratio

How to Interpret the Ratio

Several 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. In 2012 and after nearly twenty years since its last paid dividend, Apple (AAPL) began to pay a dividend 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 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 endures 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; therefore, the payout ratio does not always provide a complete picture. The augmented payout ratio incorporates share buybacks​ into the metric; it is calculated by dividing the sum of dividends and buybacks 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

    Target payout ratio is a goal companies set for the proportion ...
  3. Payout

    Payout refers to the expected financial return or monetary disbursement ...
  4. Dividend Rate

    The dividend rate is the total expected dividend payment from ...
  5. Dividend Policy

    Dividend policy structures the dividend payout a company distributes ...
  6. Preferred Dividend Coverage Ratio

    The preferred dividend coverage ratio is the ratio that measures ...
Related Articles
  1. Investing

    Payout Ratio vs. Retention Ratio: When to Use Which

    The payback ratio and retention ratio collect different information and are useful in different situations.
  2. Investing

    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 ...
  3. Investing

    The Power Of Dividend Growth

    Dividends may not seem exciting, but they can certainly be lucrative. Learn more here!
  4. Investing

    How Dividends Affect Stock Prices

    Find out how dividends affect the underlying stock's price, the role of market psychology, and how to predict price changes after dividend declarations.
  5. Insights

    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.
  6. Investing

    Is Dividend Investing a Good Strategy?

    Understanding dividends and how they generate steady income for shareholders will help you become a more informed and successful investor.
  7. Investing

    The Top 5 Companies Paying Dividends (JNJ, XOM)

    Explore analyses of the top five dividend-paying companies, and learn about their trailing 12-month dividend payouts and dividend payout ratios.
  8. Investing

    General Electric Stock: A Dividend Analysis

    Read a detailed analysis of the dividend policy of General Electric Company, and explore a comparison of the dividend policies of its competitors.
  9. Investing

    Should Google Pay A Dividend?

    By offering a modest dividend, Google would likely drive up its stock price.
RELATED FAQS
  1. 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 >>
  2. How do I calculate the dividend payout ratio from an income statement?

    Understand the dividend payout ratio, how it differs from the dividend yield and how it can be calculated from a company's ... Read Answer >>
  3. What causes dividends per share to increase?

    Learn what the major factors are that can lead to changes in a company's dividend payouts and drive increases in dividends ... Read Answer >>
Hot Definitions
  1. Risk Tolerance

    Risk tolerance is the degree of variability in investment returns that an individual is willing to withstand.
  2. Initial Coin Offering (ICO)

    An Initial Coin Offering (ICO) is an unregulated means by which funds are raised for a new cryptocurrency venture.
  3. Federal Funds Rate

    The federal funds rate is the interest rate at which a depository institution lends funds maintained at the Federal Reserve ...
  4. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  5. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  6. Restricted Stock Unit - RSU

    A restricted stock unit is a compensation issued by an employer to an employee in the form of company stock.
Trading Center