Payout Ratio

Payout ratio

Generally, the proportion of earnings paid out to the common stockholders as dividends. Morespecifically, the firm's cash dividend divided by the firm's earnings in the same reporting period.

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payout ratio

The ratio from which the percentage of net income a firm pays to its stockholders in dividends is calculated. Companies paying most of their earnings in dividends have little left for investment to provide for future earnings growth. Stock of firms with high payout ratios appeals primarily to investors seeking high current income and limited capital growth. Also called dividend payout ratio. See also dividend coverage, retained earnings.

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Payout Ratio

In fundamental analysis, the opposite of the plowback ratio. That is, the payout ratio is a company's dividends paid to shareholders expressed as a percentage of total earnings. A higher ratio indicates that a company pays more in dividends and thus reinvests less of its earnings into the company. Whether or not this is desirable depends on the rate of growth: investors tend to prefer a higher plowback ratio in a slow-growing company and a lower one in a fast-growing company.

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Payout ratio. A payout ratio, expressed as a percentage, is the rate at which a company distributes earnings to its shareholders in the form of dividends.

For example, a company that earns $5 a share and pays out $2 a share has a payout ratio of 2 to 5, or 40%.

A normal range for companies that do pay dividends is 25% to 50% of earnings. But the percentage may vary if a company keeps the amount of its dividend consistent with past dividends regardless of a drop in its earnings.