What is the dividend payout ratio?

This measures what a company pays out to investors in the form of dividends. It gives you an indication of how much money a company is returning to shareholders in relation to how much it’s retaining to reinvest in the business, pay off debt or keep in its cash reserves.

Where have you heard about the dividend payout ratio?

You may be aware that dividend payouts vary widely by industry. Firms that pay higher dividends might be in well-established industries, such as utilities, where there isn't much room for growth and paying higher dividends is the best use of profits, whereas a new company trying to expand might choose to reinvest all its profits.

What you need to know about the dividend payout ratio...

The dividend payout ratio is calculated by dividing the annual dividends per share by the earnings per share (EPS), expressed as a percentage.

For example, if a company pays out £1 per share in annual dividends and has £3 in EPS, the dividend payout ratio would be 0.33, or 33%. Many companies don’t pay yearly dividends, so a ratio of 0 is not uncommon.

By itself, the figure tells you very little, so should be used alongside other company fundamentals to gauge how sustainable a business is.