Dividend Payout Ratio: worked example
| Dividends per share (annual) | $2.40 |
|---|---|
| Earnings per share (annual) | $6.00 |
| Dividend payout ratio | 40.0% |
| Retention ratio | 60.0% |
Common error: Reading a high yield as safety. A yield can be high because the price fell, and a payout ratio above 100 percent means the dividend is being paid from something other than profit.
Dividend Payout Ratio: formula
Earnings can be volatile, so a temporary drop can push the ratio above 100% even for a healthy company. Accounting earnings differ from cash flow, and real estate investment trusts use funds from operations instead. The ratio says nothing about the company's debt obligations, which come before dividends.
Dividends per share and earnings per share should cover the same annual period, both taken from the company's reports. Use diluted earnings per share and the total regular dividends declared, excluding special one-time payments. For companies that report free cash flow, it can be worth calculating the payout against it as well, since cash covers dividends, not accounting earnings.
Dividend Payout Ratio: changing Dividends per share (annual)
| Dividends per share (annual) | Dividend payout ratio | Retention ratio |
|---|---|---|
| $1.92 | 32.0% | 68.0% |
| $2.16 | 36.0% | 64.0% |
| $2.40 (example) | 40.0% | 60.0% |
| $2.64 | 44.0% | 56.0% |
| $2.88 | 48.0% | 52.0% |
Dividend Payout Ratio: compare input ranges
| Input | Tested from | To | Dividend payout ratio: low input | Dividend payout ratio: high input | Swing |
|---|---|---|---|---|---|
| Earnings per share (annual) | $5.40 | $6.60 | 44.4% | 36.4% | 8.1% (20%) |
| Dividends per share (annual) | $2.16 | $2.64 | 36.0% | 44.0% | 8.0% (20%) |
Dividend Payout Ratio: individual input comparisons
| Input | Value | Dividend payout ratio | Retention ratio |
|---|---|---|---|
| Dividends per share (annual) | $1.92 | 32.0% | 68.0% |
| $2.16 | 36.0% | 64.0% | |
| $2.40 | 40.0% | 60.0% | |
| $2.64 | 44.0% | 56.0% | |
| $2.88 | 48.0% | 52.0% | |
| Earnings per share (annual) | $4.80 | 50.0% | 50.0% |
| $5.40 | 44.4% | 55.6% | |
| $6.00 | 40.0% | 60.0% | |
| $6.60 | 36.4% | 63.6% | |
| $7.20 | 33.3% | 66.7% |
Dividend Payout Ratio: combined input changes
| Dividends per share (annual) / Earnings per share (annual) | $4.80 | $6.00 | $7.20 |
|---|---|---|---|
| $1.92 | 40.0% | 32.0% | 26.7% |
| $2.16 | 45.0% | 36.0% | 30.0% |
| $2.40 | 50.0% | 40.0% | 33.3% |
| $2.64 | 55.0% | 44.0% | 36.7% |
| $2.88 | 60.0% | 48.0% | 40.0% |
Dividend Payout Ratio: which assumptions move the result?
Dividend Payout Ratio: values and definitions
| Quantity and definition | Value used |
|---|---|
| Dividends per share (annual) | $2.40 |
| Earnings per share (annual) | $6.00 |
| Dividend payout ratio | 40.0% |
| Retention ratio | 60.0% |
Dividend Payout Ratio: half and double Earnings per share (annual)
| Earnings per share (annual) | Dividend payout ratio |
|---|---|
| $3.00 | 80.0% |
| $6.00 | 40.0% |
| $12 | 20.0% |
Investing & Returns calculators: Earnings Per Share (EPS) Calculator, Market Cap and Enterprise Value Calculator, Book Value Per Share Calculator, Graham Number Calculator, Option Profit Calculator, Position Size Calculator.
The payout ratio shows how much of each profit dollar goes out the door as dividends. At $2.40 paid from $6.00 earned, the company sends 40 percent to shareholders and keeps 60 percent. A dividend close to all of earnings leaves no cushion, so one weak year can force a cut, while a low ratio leaves room to grow the payment.
Look at several years of payout, not one. A ratio that jumped because earnings dipped is a different story from one that has held steady.
Pair with the dividend yield calculator for income and the dividend growth calculator for the trend. The EPS calculator computes earnings per share, and the PEG and P/E pages judge valuation. A low payout with high growth can matter more than a high yield.
Does 40% payout mean a 40% dividend yield?
No. The example divides $2.40 dividends by $6 earnings per share. Dividend yield uses share price as its denominator.
Does payout over 100% prove an immediate dividend cut?
No. It means stated dividends exceed that period’s stated earnings. Cash reserves, noncash charges and capital allocation require separate examination.
What is a healthy payout ratio?
Payout compares distributions with the defined earnings. A 30% result distributes that earnings share. A 60% result distributes more.
Neither is a universal comfort band. Above 100%, dividends exceed those period earnings. A payout ratio alone does not establish distribution sustainability; cash needs and the funding source also matter.
What is the retention ratio?
It is the share of earnings kept in the business, calculated as 100% minus the payout ratio. It funds growth and debt repayment.
Why do REITs have such high payouts?
REITs are required to distribute most of their taxable income to keep their tax status, and they use funds from operations as the earnings measure.