How to use this calculator
- EPS: the annual dividend per share and earnings per share for the same year.
- Net income: total dividends paid and the company’s net income, both from the annual report.
- Free cash flow: total dividends paid and free cash flow (operating cash flow minus capital spending).
- REIT FFO: the dividend per share and funds from operations per share, for real estate investment trusts.
The formula
Payout ratio = Dividend per share ÷ EPS × 100
Payout ratio = Dividends paid ÷ Net income × 100
FCF payout ratio = Dividends paid ÷ Free cash flow × 100
FFO payout ratio = Dividend per share ÷ FFO per share × 100
Retention ratio = 100% − Payout ratio
The first two are the same measure, per share or in total. The last two swap earnings for a cash-based figure that suits some businesses better.
Worked example
- Per share: $2.00 ÷ $5.00 = 40%. The company keeps the other 60%.
- Net income: $500,000,000 paid ÷ $1,250,000,000 net income = 40%, the same answer in totals.
- Free cash flow: $500,000,000 ÷ $1,000,000,000 = 50%. Cash flow is lower than earnings here, so more of it goes to dividends.
- REIT: $3.00 ÷ $4.00 FFO per share = 75%.
Reading the result
The calculator places the ratio in a plain band: below 30%, 30% to 60%, 60% to 80%, above 80%, and above 100%. None of these is good or bad on its own. Young companies growing fast often keep almost everything. Utilities and consumer staples companies with steady demand can run high ratios for decades. What matters more is the trend: a ratio that climbs year after year while earnings stall leaves less room to keep raising the dividend.
REITs and BDCs
Real estate investment trusts must distribute at least 90% of their taxable income to keep their tax status. Their net income is also pushed down by depreciation on buildings that may hold their value. So REITs are measured against funds from operations (FFO): net income with real estate depreciation added back and gains on property sales removed. Many also report adjusted FFO (AFFO), which subtracts the regular spending needed to keep properties up.
Business development companies (BDCs) face a similar rule: as regulated investment companies they must pay out at least 90% of their investment income. They are usually judged on net investment income (NII) per share. To use it here, enter NII per share in the FFO field.
Where to find the numbers
Earnings per share and net income are on the income statement in a company’s annual or quarterly report. Total dividends paid are in the cash flow statement, under financing activities. Free cash flow isn’t usually printed as one line: take cash from operating activities and subtract capital expenditures, which appear under investing activities. REITs publish FFO, and often AFFO, in a supplemental report alongside their results. Use the same period for both numbers, ideally a full year or the last twelve months, so a seasonal quarter doesn’t distort the ratio. When a company reports both basic and diluted EPS, the diluted figure is the more cautious choice.
When the ratio stops working
If earnings are zero or negative, the ratio is meaningless, and the calculator won’t compute it. A single bad year with a large write-down can also push it above 100% even though the cash to pay the dividend is there. Check the free cash flow version, and look at several years rather than one.
Tip: to see what a company pays per share in the first place, use the Dividends per Share Calculator; to see what that dividend is worth at today’s price, use the Dividend Yield Calculator.