Payout Ratio

The payout ratio is the proportion of earnings paid out as dividends to shareholders, typically expressed as a percentage. It is calculated by dividing dividends per share by earnings per share.

A payout ratio below 60% generally indicates a sustainable dividend with room to grow. Above 100%, the company is paying out more than it earns — a dividend cut warning sign.

What this tells you

The share of earnings a company pays out as dividends. It is the affordability question that dividend yield does not answer: yield tells you what the dividend pays against the price, payout ratio tells you what it costs the company.

What it does not tell you

Measured against earnings, it can mislead in both directions, because earnings include non-cash charges that do not affect the ability to pay. A ratio computed against free cash flow is usually the more honest one. A ratio above one hundred percent means the company is paying out more than it earned, which is survivable briefly and not indefinitely. But a low ratio is not automatically safe either — it can mean a company hoarding cash it has no good use for.

Further reading: Wikipedia