Dividend Payout Ratio.
In plain English
The dividend payout ratio measures how much of a company's net earnings goes to shareholders as dividends, expressed as a percentage. A 40 percent ratio means the company pays out 40 cents of every dollar of profit and keeps the other 60 cents to grow the business, pay down debt, or hold in reserve. A very high ratio (near or above 100 percent) can be a warning sign, because the company may be paying more than it earns. A low ratio leaves more room to keep paying dividends even if profits dip.
01Why it matters
The payout ratio hints at whether a dividend is safe and sustainable. A company paying out almost all of its profit has little cushion, so a bad quarter could force it to cut the dividend you were counting on.
02The math, step by step
A company earns $4 per share in profit over a year and pays $1 per share in dividends. Its dividend payout ratio is $1 divided by $4, or 25 percent. That leaves 75 percent of profit retained, suggesting the dividend has plenty of breathing room. A different company earning $1 and paying $0.95 has a 95 percent ratio, which is far tighter.
03What this is NOT
Dividend yield compares the dividend to the stock's price (income per dollar invested). The payout ratio compares the dividend to the company's profit (how much of earnings is paid out). One is about your return; the other is about the dividend's safety.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
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