Definition
The dividend payout ratio shows what portion of earnings is distributed to shareholders as dividends. A 50% payout means half of profits go to dividends; the rest is retained for growth. Very high payouts (>80%) may be unsustainable; very low payouts suggest potential for dividend increases or that the company prioritizes reinvestment.
Formula
Payout Ratio = Annual Dividends Per Share / Earnings Per Share × 100%
Example
A company earns $4 EPS and pays $2 dividend. The 50% payout ratio suggests a sustainable dividend with room for increases.
FAQ
What is Payout Ratio?
The percentage of earnings paid out as dividends.
How do you calculate Payout Ratio?
A common formula for Payout Ratio is: Payout Ratio = Annual Dividends Per Share / Earnings Per Share × 100%
Why is Payout Ratio important?
Payout Ratio helps investors evaluate dividends and make more informed decisions.