what is the payout ratio 
the payout ratio is a financial metric that shows the proportion of earnings a company pays its shareholders in the form of dividends it s expressed as a percentage of the company s total earnings but it can refer to the dividends paid out as a percentage of a company s cash flow in some cases the payout ratio is also known as the dividend payout ratio eliana rodgers investopediaunderstanding the payout ratiothe payout ratio is a key financial metric that s used to determine the sustainability of a company s dividend payment program it s the amount of dividends paid to shareholders relative to the total net income of a company 1the payout ratio is an important metric for determining the sustainability of a company s dividend payment program but other factors should be considered as well the latter may boast greater dividend sustainability even though the former demonstrates a lower absolute payout ratio if company a is a commodity producer and company z is a regulated utility there s no single number that defines an ideal payout ratio because the adequacy largely depends on the sector in which a given company operates companies in defensive industries such as utilities pipelines and telecommunications tend to boast stable earnings and cash flows that can support high payouts over the long haul income driven investors have been advised to look for a ratio in the neighborhood of 60 however even 35 to 55 is considered strong 2companies in cyclical industries typically make less reliable payouts because their profits are vulnerable to macroeconomic fluctuations people spend less of their incomes on new cars entertainment and luxury goods in times of economic hardship companies in these sectors consequently tend to experience earnings peaks and valleys that fall in line with economic cycles example of the payout ratiolet s assume company a has earnings per share of 1 and pays dividends per share of 0 60 the payout ratio would be 60 0 6 1 let s further assume that company z has earnings per share of 2 and dividends per share of 1 50 the payout ratio is 75 1 5 2 in this scenario company a pays out a smaller percentage of its earnings to shareholders as dividends giving it a more sustainable payout ratio than company z payout ratio formulad p r total dividends net income where d p r divided payout ratio or simply payout ratio begin aligned dpr dfrac textit total dividends textit net income textbf where dpr text divided payout ratio or simply payout ratio end aligned dpr net incometotal dividends where dpr divided payout ratio or simply payout ratio some companies pay out all their earnings to shareholders others dole out just a portion and funnel the remaining assets back into their businesses the measure of retained earnings is known as the retention ratio the higher the retention ratio the lower the payout ratio the payout ratio would be 25 000 100 000 25 if a company reports a net income of 100 000 and issues 25 000 in dividends this implies that the company boasts a 75 retention ratio it records the remaining 75 000 of its income for the period in its financial statements as retained earnings this appears in the equity section of the company s balance sheet the following year companies with the best long term records of dividend payments generally have stable payout ratios over many years but a payout ratio greater than 100 suggests that a company is paying out more in dividends than its earnings can support this might be cause for concern regarding sustainability 3