Payout Ratio

Dividends divided by earnings — measures dividend sustainability.

Payout ratio measures what percentage of earnings is paid out as dividends: Dividends / Net Income. A 60% payout means $0.60 of every $1 earned goes to shareholders; $0.40 is retained for reinvestment. Sustainability check: <70% is generally sustainable, 70-90% is aggressive, >90% is risky (limited cushion for earnings volatility). Growth stage matters: Mature companies (utilities, consumer staples) often have 60-80% payouts — stable earnings, limited growth opportunities. Growth companies have 0-30% payouts — they reinvest in growth. Danger signs: Payout >100% means the company pays more than it earns — unsustainable, likely dividend cut ahead. Alternative for REITs: Use Dividends / FFO (funds from operations) since REITs have large non-cash D&A.

Formula

\text{Payout Ratio} = \frac{\text{Dividends}}{\text{Net Income}} \times 100\%