Income · Investing Glossary
What Is Payout Ratio?
The percentage of earnings a company pays out as dividends.
The Full Definition
The payout ratio is the percentage of a company's earnings distributed to shareholders as dividends. A 40% payout ratio means the company pays out 40 cents in dividends for every dollar earned, keeping 60 cents to reinvest. A very high payout ratio (above 80–90%) may indicate the dividend is at risk if earnings dip. A sustainable payout ratio with room to grow is one of the key signals of dividend safety.
Real-World Example
A company earning $4 per share and paying a $1.60 annual dividend has a 40% payout ratio — generally considered healthy and sustainable. A company with a 95% payout ratio has almost no margin for error if earnings decline.
Related Terms
DividendA cash payment a company makes to shareholders, usually quarterly.Dividend YieldAnnual dividends paid as a percentage of the stock's current price.Dividend GrowthA company increasing the amount of its dividend payment year over year.Free Cash Flow (FCF)Cash a company generates after accounting for capital expenditures.