Loading the player...

## What is the 'Payout Ratio'

Payout ratio is the proportion of earnings paid out as dividends to shareholders, typically expressed as a percentage. The payout ratio can also be expressed as dividends paid out as a proportion of cash flow.

The Payout Ratio is calculated as follows:

Payout Ratio = (Dividends per Share (DPS) / Earnings per Share (EPS)) x 100

Or

Payout Ratio = (Total Dividends Paid / Net Income) x 100

The Payout Ratio is also known as the dividend payout ratio.

Next Up

## BREAKING DOWN 'Payout Ratio'

At the end of a period, some companies pay out dividends to shareholders. The dividends are paid out of the company's net earnings, and represent a return on investment to shareholders. Each year, a company that decides to pay dividends to shareholders declares a dividend payment and the amount of dividend per share. For example, a company may declare a dividend of \$0.35 in June to be paid to its investors in August. An investor that owns 100 shares of the company will receive \$0.35 x 100 = \$35 on the dividend payment date in August.

The payout ratio is a key financial metric used to determine the sustainability of a company’s dividend payments. It is the amount of dividends paid to shareholders relative to the total net income of a company. For example, Company X with earnings per share of \$1 and dividends per share of \$0.60 has a payout ratio of 60%. Company Y with earnings per share of \$2 and dividends per share of \$1.50 has a payout ratio of 75%. Which company has the more sustainable payout ratio?

It really depends, since there is no single number that defines an appropriate payout ratio. The adequacy of the payout ratio depends very much on the sector. Companies in defensive industries, such as utilities, pipelines, and telecommunications, have stable and predictable earnings and cash flows, and thus can support much higher payouts than cyclical companies. Companies in cyclical sectors, such as resources and energy, typically have lower payouts since their earnings fluctuate considerably in line with the economic cycle.

In the previous example, if Company X is a commodity producer and Company Y is a regulated utility, Y’s dividend sustainability may be better than that of X, even though X has a lower absolute payout ratio than Y.

Some companies pay out all their earnings to shareholders, while some only pay out a portion of their earnings. If a company pays out some of its earnings as dividends, the remaining portion is retained by the business. To measure the level of earnings retained, the retention ratio is calculated. A lower payout ratio indicates that the company is using more of its earnings to reinvest in the company in order to grow further. In this case, the retention ratio will be high. A high payout ratio may mean that the company is sharing more of its earnings with its shareholders. If this is the case, the retention ratio will be low. A payout ratio greater than 100% may be interpreted to mean that the company is paying out more in dividends than it is earning, which is an unsustainable move.

Many companies set a target range for their payout ratios, and define them as a percentage of sustainable earnings, or cash flow. The companies with the best long-term record of dividend payments have stable payout ratios over many years. While many blue-chip companies increase their dividends year after year, since they have steady earnings growth as well, their payout ratios remain remarkably stable over extended periods.

RELATED TERMS
1. ### Target Payout Ratio

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

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

A dividend is a distribution of a portion of a company's earnings, ...
4. ### Dividend Rate

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

A special dividend is a non-recurring distribution of company ...
6. ### Dividend Per Share - DPS

Dividend per share is the total dividends declared in a year ...
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

### The Power Of Dividend Growth

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

### The 3 Biggest Misconceptions of Dividend Stocks

To find the best dividend stocks, focus on total return, not yield.
5. Investing

### McDonald's Stock: A Dividend Analysis (MCD)

Learn about the strength of McDonald's annual dividend through an analysis of its financial statements and several financial ratios.
6. Investing

### Roche Stock: A Dividend Analysis

Learn about Roche's financial strength via an examination of its financial statements, and discover the security of the company's annual dividend going forward.
7. 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.
8. Investing

### The Top 5 Dividend-Paying Financials Stocks for 2016 (WFC, JPM)

Discover analyses of the top five dividend-paying financial stocks for 2016, and learn why their stock prices and dividends are poised to rise.
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. ### 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 >>
4. ### How do you calculate a payout ratio using Excel?

Learn what the payout ratio is, what dividends per share and earnings per share are, and how the payout ratio is calculated ... Read Answer >>
5. ### Do I receive the posted dividend yield every quarter?

Learn how companies with stock that pays dividends will typically distribute the dividend each quarter. Find out how much ... Read Answer >>
Hot Definitions
1. ### Price-Earnings Ratio - P/E Ratio

The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
2. ### Internal Rate of Return - IRR

Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
3. ### Limit Order

An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
4. ### Current Ratio

The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.
5. ### Return on Investment (ROI)

Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency ...
6. ### Interest Coverage Ratio

The interest coverage ratio is a debt ratio and profitability ratio used to determine how easily a company can pay interest ...
Trading Center