Dividend Payout Ratio

The dividend payout ratio shows how much of a company's net income is handed to shareholders as dividends. The math is simple: earn $100 million and pay out $30 million, and the payout ratio is 30%. You get the same answer per share by dividing dividend per share by earnings per share.

Reading the number takes context. Fast-growing companies need to plow earnings back into the business, so a payout of 0% to 20% is natural. Mature companies with fewer places to invest commonly run 40% to 60%. A low payout ratio does not mean a company is stingy with shareholders.

The warning sign is a ratio above 100%. That means the company is paying out more than it earned, likely dipping into reserves or borrowing to fund the dividend. Payouts like that rarely last and usually get cut.

So never look at dividend yield alone. Yield tells you what you receive now; the payout ratio tells you whether you can keep receiving it. Earnings are an accounting figure while dividends are real cash, so it also helps to check that operating cash flow covers the payment.