Payout ratio: how much of the profit goes to dividends

The formula

Payout ratio = Dividends per share ÷ Earnings per share × 100

You can use per-share numbers or company totals (all dividends paid ÷ net income); the result is the same. What is left over, 100% minus the payout ratio, is the share of earnings the company keeps, sometimes called the retention ratio.

Example

A company earned $5.00 a share last year and paid $2.00 in dividends: $2.00 ÷ $5.00 = 40%. It kept the other 60% of its earnings.

Over 100%

If earnings drop to $1.60 a share and the dividend stays at $2.00, the payout ratio is 125%. The company is paying more than it earned that year, so part of the dividend comes from cash it already had, from borrowing, or from other money. That can last a while, but not forever.

The cash-flow version

Earnings include costs that aren’t cash, such as depreciation, so some investors divide dividends by free cash flow instead. A company that paid $800 million in dividends from $1,000 million of free cash flow has a cash payout ratio of 80%. The difference matters most for companies with large depreciation charges, such as REITs, whose earnings can be well below the cash they bring in.

Where to find the numbers

Earnings per share and dividends per share are in the company’s annual report and on most quote pages. Work it out for any company with the Payout Ratio Calculator, which takes either per-share numbers or totals.