payout ratio
The proportion of earnings paid to shareholders as dividends, expressed as a percentage. High payout ratios leave less money for reinvestment.
Example
“The company's 40% payout ratio meant it returned 40% of profits as dividends and reinvested the remaining 60%.”
Memory Tip
PAYOUT ratio = what percentage of profits gets PAID OUT to shareholders.
Why It Matters
The payout ratio helps you understand whether a company is prioritizing returning cash to shareholders now or investing in future growth. If you rely on dividend income, a higher payout ratio means more money in your pocket today, but if you seek capital appreciation, a lower ratio might indicate stronger long-term potential.
Common Misconception
Many investors believe that a high payout ratio is always better because it means more dividends, but this can be misleading. A company paying out 90 percent of earnings may lack the financial flexibility to invest in innovation, weather economic downturns, or sustain dividends if earnings decline.
In Practice
Company A earns 10 dollars per share and pays 3 dollars in dividends, resulting in a 30 percent payout ratio, while Company B earns the same amount but pays 8 dollars in dividends for an 80 percent payout ratio. Company A retains more capital for expansion and research, potentially driving future growth, while Company B gives shareholders immediate income but has limited resources for reinvestment.
Etymology
PAYOUT (amount paid out) RATIO (proportion). What RATIO of earnings are PAID OUT as dividends.
Common Misspellings
Start investing with no commission trades
Related Terms
More in investing
Other investing terms you should know
Need financial definitions?
Clear definitions for 2,500+ finance, insurance, and investing terms.