Payout Ratio

The Payout Ratio is the proportion of earnings paid out as dividends to shareholders, typically expressed as a percentage. It is an absolute necessity for income investors to verify whether a company can actually afford its dividend without suffocating its own growth.

Quick Reference

Type	Income Metric
Formula	Dividends per Share ÷ Earnings per Share (EPS)
Safe Target	30% - 60%
Danger Zone	> 100%

1.0 The Formula

Basic Form

formulaPayout Ratio = Total Dividends Paid / Net Income
Or simply: Dividends per Share / Earnings per Share

Worked Example

Company	EPS	Dividend per Share	Payout Ratio
Company X	$5.00	$2.00	40%
Company Y	$1.00	$1.50	150%

Company X is safely paying out 40% of its profits and retaining 60% to reinvest in growth. Company Y is paying out more than it earns. This means Company Y is either raiding its cash reserves or borrowing money to pay shareholders. The dividend is destined to be cut.

2.0 Interpretation & Edge Cases

Some specific asset classes have unique rules. Real Estate Investment Trusts (REITs) are legally required to pay out 90% of their taxable income to maintain their tax-exempt status. Therefore, a 95% payout ratio for a REIT is perfectly normal, while a 95% payout ratio for a tech stock is a catastrophic warning sign.

Smart investors prefer to calculate the Cash Payout Ratio instead, dividing Dividends by Free Cash Flow, as Net Income is easily skewed by non-cash accounting adjustments.

1.0 The Formula

Basic Form

Worked Example

2.0 Interpretation & Edge Cases

3.0 Related Pages

Dividend Yield

Earnings Per Share (EPS)