Dividend Payout Ratio

The dividend payout ratio is the share of earnings a company pays out as dividends, calculated as dividends divided by net income. It shows how much profit is returned to shareholders versus reinvested in the business. A sustainable payout ratio is key to a dependable dividend.

Use the payout ratio to judge dividend safety: a ratio comfortably below 100 percent leaves room to keep paying through tough years, while a ratio above 100 percent means the company is paying more than it earns, which is rarely sustainable. Mature companies often run higher payouts, while growth firms keep them low to reinvest.

A company earns 4 dollars per share and pays 1.50 dollars in dividends, giving a payout ratio of about 38 percent. That leaves most earnings to reinvest while still rewarding shareholders, a generally healthy balance.