What Is a Dividend Payout Ratio? (2024)

FAQs

What Is a Dividend Payout Ratio? ›

Put simply, this ratio is the percentage of earnings paid to shareholders via dividends. The amount not paid to shareholders is retained by the company to pay off debt or to reinvest in its core operations. The dividend payout ratio is sometimes simply referred to as the payout ratio.

So, what counts as a “good” dividend payout ratio? Generally speaking, a dividend payout ratio of 30-50% is considered healthy, while anything over 50% could be unsustainable.

Say a company earns $100 million this year and makes $50 million in dividend payments to its shareholders. In this case, its dividend payout ratio would be 50%. You can also use per-share amounts to get the same result. This can be simpler since companies report dividends and earnings in per-share amounts.

Example of the Payout Ratio

Let's assume Company A has earnings per share of $1 and pays dividends per share of $0.60. The payout ratio would be 60% (0.6 ÷ 1). Let's further assume that Company Z has earnings per share of $2 and dividends per share of $1.50. The payout ratio is 75% (1.5 ÷ 2) in this scenario.

Generally speaking, a DCR of 2 is viewed as good, as this indicates that a company has the capacity to pay its dividends twice over. A DCR of below 1.5 is viewed as a possible concern, signalling the use of loans.

Healthy. A range of 35% to 55% is considered healthy and appropriate from a dividend investor's point of view. A company that is likely to distribute roughly half of its earnings as dividends means that the company is well established and a leader in its industry.

Dividend Data

Apple Inc.'s ( AAPL ) dividend yield is 0.52%, which means that for every $100 invested in the company's stock, investors would receive $0.52 in dividends per year. Apple Inc.'s payout ratio is 15.08% which means that 15.08% of the company's earnings are paid out as dividends.

A payout ratio over 100 may indicate that the dividend is in jeopardy, because no company can continue to pay out more than it earns indefinitely.

Dividend Data

WK Kellogg Co's payout ratio is 580.67% which means that 580.67% of the company's earnings are paid out as dividends.

A low dividend payout is when a company keeps the majority of its profits and reinvests it in the business and then gives out the rest as dividends. For example, if a company reinvests 60% of its profits back into the business and then pays out the rest in dividends, it has a dividend payout of 40%.

What is the preferred dividend payout ratio? ›

The dividend payout ratio is the measure of dividends paid out to shareholders relative to the company's net income. A preferred dividend is one that is accrued and paid on a company's preferred shares. Their dividend payments take preference over common shares.

A low dividend payout ratio is considered preferable to a high dividend ratio because the latter may indicate that a company could struggle to maintain dividend payouts over the long term.

Real estate investment trusts (REITs) are required to pay out at least 90% of income as shareholder dividends. Book value ratios are useless for REITs. Instead, calculations such as net asset value are better metrics. Top-down and bottom-up analyses should be used for REITs.

Yields from 2% to 6% are generally considered to be a good dividend yield, but there are plenty of factors to consider when deciding if a stock's yield makes it a good investment. Your own investment goals should also play a big role in deciding what a good dividend yield is for you.

$4 annual dividend per share / $10 EPS = 40%

A 40% payout ratio would be favorable for an investor because a payout ratio below 50% gives a company enough flexibility to reward shareholders while reinvesting in new projects. Some profitable companies, such as Alphabet Inc.

Payout Ratio Basics

If a company has a dividend payout ratio over 100% then that means that the company is paying out more to its shareholders than earnings coming in. This is typically not a good recipe for the company's financial health; it can be a sign that the dividend payment will be cut in the future.