Payout Ratio

The latest indicated annual dividend rate divided by the latest 12 months' EPS. Basically, this tells us how much of earnings are paid out in dividends. A company with a high payout ratio can be appealing to conservative investors who want income, but by paying out so much of earnings, the company will have little left to finance growth. A high payout ratio can be cause for concern when coupled with weak or falling earnings, since it could mean a dividend cut is in the offing, or that the company is shortchanging reinvestment to keep up its payout. For most companies, the payout ratio should not exceed two-thirds of earnings.

Like most ratios, however, this one varies with industry. Real estate investment trusts pay out almost all their earnings because of a provision in the law that exempts them from taxes if they do so. Utilities also have high payout rates. By contrast, newer, faster growing companies often pay no dividends at all.



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