what is a dividend payout ratio 
the dividend payout ratio is the total amount of dividends that a company pays to shareholders relative to its net income 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 investopedia zoe hansenformula and calculation of dividend payout ratiothe dividend payout ratio can be calculated as the yearly dividend per share divided by the earnings per share eps or equivalently the dividends divided by net income as shown below dividend payout ratio dividends paid net income begin aligned text dividend payout ratio frac text dividends paid text net income end aligned dividend payout ratio net incomedividends paid alternatively the dividend payout ratio can also be calculated as dividend payout ratio 1 retention ratio begin aligned text dividend payout ratio 1 text retention ratio end aligned dividend payout ratio 1 retention ratio on a per share basis the retention ratio can be expressed as retention ratio eps dps eps where eps earnings per share dps dividends per share begin aligned text retention ratio frac text eps text dps text eps textbf where text eps text earnings per share text dps text dividends per share end aligned retention ratio epseps dps where eps earnings per sharedps dividends per share the dividend payout ratio indicates how much money a company returns to shareholders versus how much it keeps to reinvest in growth pay off debt or add to cash reserves if you are given the sum of the dividends over a certain period and the outstanding shares you can calculate the dividends per share dps suppose you are invested in a company that paid 5 million last year with five million shares outstanding on microsoft excel enter suppose the company had a net income of 50 million last year the formula for earnings per share is net income preferred dividends shares outstanding enterfinally calculate the payout ratio by entering investors use the ratio to gauge whether dividends are appropriate and sustainable the payout ratio depends on the sector for example startups may have a low or no payout ratio because they are more focused on reinvesting their income to grow the business understanding the dividend payout ratiothe dividend payout ratio is 0 for companies that do not pay dividends and 100 for companies that pay out their entire net income as dividends several considerations go into interpreting the dividend payout ratio most importantly the company s level of maturity in 2012 and after nearly twenty years since its last paid dividend apple aapl began to pay a dividend when the new chief executive officer ceo felt the company s enormous cash flow made a 0 payout ratio difficult to justify 12 since higher dividends are often a sign that a company has moved past its initial growth stage a higher payout ratio means share prices are unlikely to appreciate rapidly the payout ratio is also useful for assessing a dividend s sustainability companies are extremely reluctant to cut dividends because it can drive the stock price down and reflect poorly on management s abilities if a company s payout ratio is over 100 it returned more money to shareholders in the year it earned and may be forced to lower the dividend or stop paying it altogether since overpayment is likely to be unsustainable a company may endure a bad year without suspending payouts it is often in its interest to do so because investors will expect a dividend not paying one can be an extremely negative signal about where the company is headed investors react badly to companies paying lower than expected dividends which is why share prices fall when dividends are cut long term trends in the payout ratio also matter a steadily rising ratio could indicate a healthy maturing business but a spiking one could mean the dividend is heading into unsustainable territory the retention ratio is a converse concept to the dividend payout ratio the dividend payout ratio evaluates the percentage of profits earned that a company pays out to its shareholders while the retention ratio represents the percentage of profits earned that are retained by or reinvested in the company dividend payouts vary widely by industry and like most ratios they are most useful to compare within a given industry for example real estate investment trusts reits are legally obligated to distribute at least 90 of earnings to shareholders as they enjoy special tax exemptions 3 master limited partnerships mlps tend to have high payout ratios as well dividends are not the only way companies can return value to shareholders therefore the payout ratio does not always provide a complete picture the augmented payout ratio incorporates share buybacks into the metric which is calculated by dividing the sum of dividends and buybacks by net income for the same period if the result is too high it can indicate an emphasis on short term boosts to share prices at the expense of reinvestment and long term growth another adjustment that can be made to provide a more accurate picture is to subtract preferred stock dividends for companies that issue preferred shares dividend payout ratio vs dividend yield