Payout Ratio Explained

The payout ratio measures the percentage of earnings paid to shareholders as dividends. It is one of the most important dividend-safety indicators.

Payout ratio formula

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

How to interpret payout ratio

• A moderate payout ratio may indicate a sustainable dividend with room for reinvestment.
• A very high payout ratio may signal limited flexibility or dividend risk.
• A negative or distorted payout ratio can occur when earnings are temporarily negative or unusually low.

Payout ratio vs. cash flow

Earnings-based payout ratios are useful, but free cash flow is often a better test of dividend sustainability because dividends are paid in cash.