Dividends
Payout Ratio
The payout ratio is the share of profit, or of free cash flow, that is paid out as dividends.
Yield tells you the income. The payout ratio tells you whether the income is affordable. A company paying out 40% of earnings has room to keep the dividend through a soft year and room to invest. A company paying out 110% is borrowing the difference, selling assets, or heading for a cut.
Earnings-based payouts can look scary in a year of write-downs while cash payouts look fine, or the reverse when cash is absorbed by capital spending. Check both. REITs and partnerships are required to distribute most of their taxable income, so a high payout there is the business model, not automatically a warning.
Formula
Payout ratio = dividends ÷ earnings (or ÷ free cash flow)
Live example
Apple Inc. (AAPL) last printed at $345.65 with a market cap of $5.04T. This quote has no dividend yield, which is itself the example: yield is blank when no dividend is being capitalized.
Related
Dividend Yield · Free Cash Flow · Dividend Growth
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Questions
What payout is safe?
There is no universal line. Under 60% of sustainable free cash flow is comfortable for most operating companies. Cyclical businesses need more cushion at the top of the cycle.
Can the payout ratio exceed 100%?
Yes, for a while. It means dividends are larger than the earnings in the denominator. That can be a special dividend or a problem.