Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Payout Ratio

What it is:

The payout ratio, or dividend payout ratio, is the percentage of a company's earnings paid out to investors as cash dividends.

How it works (Example):

At the end of a specified period, companies will sometimes pay out dividends for every share owned. Theoretically, the money for these dividends comes from the company's earnings from that period. Thus, the payout ratio is calculated as the percentage of earnings paid out as dividends.

The formula for calculating the payout ratio is:

Payout ratio = (dividends paid/net earnings for the period) x 100

For example, if Company XYZ earned $1.00 per share in the fourth quarter and paid a dividend of $0.60 per share, its payout ratio would equal 60%.

Why it Matters:

A company's payout ratio can reveal many things. A low ratio may indicate the company is using much of its earnings to reinvest in the company in order to grow further. Conversely, a high payout ratio can indicate a willingness to share more of the company's earnings with investors. Large, slow-growth companies such as telecoms or utilities offer typically offer high payout ratios.

Investors should be wary of payout ratios over 100%, as this means the company is paying out more than it is earning -- an unsustainable condition. There are some instances, however, where payout ratios over 100% simply indicate a company has high depreciation costs -- which are a non-cash charge that impact net earnings, but not cash available to pay investors.

Related Terms View All
  • World Bank
    Based in Washington, D.C., the World Bank is funded and managed by several member...
  • Macroprudential Analysis
    In the United States, stress tests are the most common example of macroprudential...
  • Managed Futures Account
    When you buy a managed futures account, in essence you're hiring an expert to buy, sell...
  • Real Interest Rate
    Let's say John Doe has a bond from Company XYZ that pays a 4% coupon. If the inflation...
  • Vance D. Coffman
    Born in Kinross, Iowa, on April 3, 1944, Coffman earned his bachelor's degree in...