Payout ratio

The share of earnings paid out as dividends. What remains is retained and reinvested in the business.

Example

A dividend of 1.60 against earnings of 2.50 is a payout ratio of 64%, leaving 36% retained.

Important

Retention is where growth comes from: 36% retained earning 10% inside the business implies income growth of 3.6% a year. A payout ratio above 100% means the dividend is being funded from somewhere other than this year's earnings.

Related terms

• Dividend yield — The cash dividend paid over a year divided by the current share price - the income return actually received by a holder.
• Gordon growth model — The relationship that values a growing perpetual income stream as next year's income divided by the required return less the growth rate. The same formula produces a terminal value and a capitalisation rate.
• Retained earnings — The accumulated total of every profit the business has ever made and not paid out to its owners, carried on the balance sheet inside equity.

Lessons that explain it

• Where an equity return comes from: cash paid out, and cash kept in — Two sources, one pool. A company either hands you cash or reinvests it on your behalf - and a company that reinvests is not withholding your return. (11 min)
• Yield-based valuation: pricing the income — Start from the money the asset actually pays out and the return you require, and the price falls out of the division. The simplicity is real, and it conceals the same growth assumption everything else makes. (11 min)

All 578 terms in the Investing glossary