Payout ratio
AccountingDefinition
The percentage of a company's profit that it sends back to shareholders as dividends. A low payout ratio means the dividend is well-covered by earnings and has room to grow. A very high payout ratio (above 80%) is a warning sign: if earnings dip even slightly, the company may have to cut the dividend.
REITs (real estate investment trusts) are legally required to pay out at least 90% of taxable income, so they naturally run very high payout ratios. Mature companies usually target 30-60%. High-growth companies typically pay no dividend at all and reinvest everything back into the business.
REITs (real estate investment trusts) are legally required to pay out at least 90% of taxable income, so they naturally run very high payout ratios. Mature companies usually target 30-60%. High-growth companies typically pay no dividend at all and reinvest everything back into the business.
Formula
Payout ratio = Dividends per share divided by Earnings per share
Example
A company earns $5 per share and pays $2 per share in dividends. Payout ratio is 40%. Plenty of cushion, and plenty of room for the dividend to rise if earnings grow.