What is a 'Payout'

A payout is the expected financial return from an investment over a given period of time; it may be expressed on an overall or periodic basis as either a percentage of the investment's cost or in a real dollar amount. Payout can also refer to the period of time in which an investment or a project is expected to recoup its initial capital investment and become minimally profitable. It is short for "time to payout," "term to payout" or "payout period."

BREAKING DOWN 'Payout'

In terms of financial securities such as annuities and dividends, payouts refer to the amounts received at given points in time. For example, in the case of an annuity, payouts are made to the annuitant at regular intervals such as monthly or quarterly.

Payout Ratio as a Measure of Distribution

There are two main ways companies can distribute earnings to investors: dividends and share buybacks. With dividends, payouts are made by corporations to their investors and can be in the form of cash dividends or stock dividends. The payout ratio is the percentage rate of income the company pays out to investors in the form of distributions. Some payout ratios include both dividends and share buybacks, while others only include dividends.

For example, a payout ratio of 20% means the company pays out 20% of company distributions. If company A has $10 million in net income, it pays out $2 million to shareholders. Growth companies and newly formed companies tend to have low payout ratios. Investors in these companies rely more on share price appreciation for return than dividends and share buybacks.

The payout ratio is calculated with the following formula: total dividends / net income. The payout ratio can also include share repurchases, in which case the formula is: (total dividends + share buybacks) / net income. The cash amount paid out to dividends can be found on the cash flow statement in the section titled cash flows from financing. Dividends and stock repurchases both represent an outflow of cash and are classified as outflows on the cash flow statement.

Payout and Payout Period as a Capital Budgeting Tool

Payout may also refer to the capital budgeting tool used to determine the number of years it takes for a project to pay for itself. Projects that take a longer period of time are considered less desirable than projects that take a shorter time period. The payout, or payback period, is calculated by dividing the initial investment by the cash inflow per period. If company A spends $1 million on a project that saves $500,000 a year for the next five years, the payout period is calculated by dividing $1 million by $500,000. The answer is two, which means the project will pay for itself in two years.

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. Lifetime Payout Annuity

    A type of insurance product that pays out a portion of the underlying ...
  4. Single Payment Options Trading ...

    A type of option product that allows an investor to set not only ...
  5. Dividend Signaling

    A theory that suggests company announcements of an increase in ...
  6. Joint-Life Payout

    One of two options normally available for retirees to choose ...
Related Articles
  1. Investing

    Lessons On Corporate Dividend Payout And Retention Ratio

    Why are dividend payout and retention ratios important to consider when investing in company stock? What companies have high ratios?What constitutes a high dividend payout and retention ratio? ...
  2. 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.
  3. Investing

    Does Costco Stock Pay Dividends?

    Understand Costco's dividend payout strategy and whether it is a good income investment. Learn about key factors contributing to its payout ratio.
  4. 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.
  5. Retirement

    Selecting the payout on your annuity

    Are you thinking of purchasing annuity? Make sure you understand your options for withdrawing your funds from this complex instrument.
  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

    IBM: Dividend Analysis

    Even with declining revenue and earnings, IBM dividends have been on the rise thanks to the company's ample cash flow from operations.
  8. Investing

    The 3 Biggest Misconceptions of Dividend Stocks

    To find the best dividend stocks, focus on total return, not yield.
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 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 >>
  4. 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. Treasury Yield

    Treasury yield is the return on investment, expressed as a percentage, on the U.S. government's debt obligations.
  2. Return on Assets - ROA

    Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets.
  3. Fibonacci Retracement

    A term used in technical analysis that refers to areas of support (price stops going lower) or resistance (price stops going ...
  4. Ethereum

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

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  6. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
Trading Center