Payout Ratio

It can also be calculated per share:

For example, if a company earns 2.00 per share and pays an annual dividend of 0.80 per share, its payout ratio is 40%.

How to interpret the payout ratio

There is no perfect number for every company. The right range depends on the sector, business stability, balance sheet strength, and growth opportunities.

• Below 40%: often suggests room to reinvest or increase the dividend, although some companies simply prefer growth over distributions.
• 40% to 70%: often a comfortable range for mature, profitable businesses.
• 70% to 100%: requires closer analysis because the dividend depends heavily on stable earnings.
• Above 100%: means the company is paying more than it earns. This may be temporary, but repeated readings raise the risk of a dividend cut.

Practical example

Imagine two companies with the same 5% dividend yield.

Company A pays a 1.00 dividend and earns 3.00 per share, so its payout ratio is 33%. Company B also pays a 1.00 dividend, but earns only 1.10 per share, so its payout ratio is 91%.

The yield is the same, but Company A has a wider margin of safety. Company B needs almost all of its current earnings to maintain the dividend.

Sector context matters

The payout ratio should be compared with similar companies. A regulated utility, an insurer, a technology company, and a REIT can have very different investment needs and earnings patterns.

Defensive and mature businesses can often sustain higher payout ratios. Cyclical companies usually need more room because earnings can fall sharply during downturns. High-growth companies may have a low or zero payout ratio if reinvestment creates better long-term value.

Payout ratio vs dividend yield

Dividend yield compares the dividend with the current share price. Payout ratio compares the dividend with company earnings.

A high dividend yield can look attractive, but if it comes with an excessive payout ratio it may be a warning sign. Many dividend investors therefore use both metrics together: yield shows income potential, while payout ratio helps assess sustainability.

Limitations

Net income can be affected by one-off accounting items. For some companies, free cash flow, debt levels, dividend history, and earnings guidance are just as important as the reported payout ratio.

For businesses with volatile earnings, a single year can be misleading. Looking at several years helps show whether the dividend is supported by recurring profits.