What Is the Payout Ratio?
The payout ratio shows how much of a company's profit it pays out as dividends. A 40% payout ratio means 40 cents of every dollar of profit goes to shareholders.
How to calculate it
Dividends÷Net income×100=Payout %
A company earns $4 per share and pays $1.60 per share in dividends. Its payout ratio is 40%.
What is a safe payout ratio?
Many investors feel comfortable with 30% to 60% for normal companies. That leaves room to grow the dividend and handle a bad year. REITs and utilities often pay out much more by design.
Above 100% is a warning
If a company pays out more than it earns, it is using savings or borrowing to pay owners. That cannot last forever. A dividend cut often follows. Comparing dividends with free cash flow is an even better check.
See it in real companies
Open a company to see what it sells and how it makes money.
Related terms
DividendCash a company pays its owners.
Dividend yieldYearly dividend as a percent of the share price.
Dividend investingBuilding income from dividend stocks.
Free cash flowReal cash left after running and growing the business.
Net incomeThe final profit after every cost.
Stock buybackWhen a company buys its own shares.