We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What is a Payout Ratio?

By Adam Hill
Updated May 16, 2024
Our promise to you
SmartCapitalMind is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At SmartCapitalMind, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject-matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

One of the factors to consider when investing in stocks is whether a company you invest in pays a dividend or not. A dividend is when a part of the company's earnings are given back to the shareholders, depending on how many shares they own. Usually, not all the earnings are given back, but rather just a percentage of them. This percentage is what the payout ratio consists of. It is calculated as the yearly dividend paid per share, divided by the earnings per share during the same year.

A payout ratio is written in percentages. If the ratio is 0%, this means there is no dividend paid to the shareholders. Many stocks do not pay yearly dividends, so a ratio of 0 is not uncommon. A 100% payout ratio means that all the company's earnings are given to the shareholders, who are technically the company's owners. A relatively high payout ratio may indicate that little or no expansion is to be expected from the company in the near future.

There is nothing wrong with a high payout ratio. It may mean nothing more than that a higher return would be gained from shareholders investing dividends on their own, rather than the company investing more of their earnings. In some cases, the ratio may exceed 100%. While this can be a profitable situation in the short term for investors, it is not a sustainable condition.

One time when this high of a ratio might be seen is in an environment of economic pessimism or slowdown. A company may temporarily increase its dividend and payout ratio to keep the stock attractive — and its price stable — because any other course might prove damaging to the price of the stock. A dividend that stays above 100% of the company's earnings is generally not seen as a good long-term sign for the company.

Many financial advisors counsel that the most ideal payout ratio is between 40 and 60%. This allows the investor to collect a good periodic income from dividends, if their holdings are substantial. It also means that the company has in mind the importance of continued growth, in the near term as well as the more distant future. Most balanced portfolios will contain some dividend-paying stocks, both as a way to increase the portfolio's income in the short term, and to help it beat inflation in the long run.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Discussion Comments
By MrMoody — On Sep 27, 2011

@hamje32 - I think that’s the average payout ratio for most companies nowadays.

One thing that should be pointed out is that payout ratios for those same companies can increase over time. They may start out low because they are using most of their profits to reinvest in the business, but as the company grows, it can afford to increase its payout ratio.

Eventually it reaches a plateau, like the article says, and can give you close to 100% dividend payout ratio. Whether that’s a good or bad thing, you’ll have to decide. But it’s nice to have stocks that pay something regardless of the performance of their share price.

By hamje32 — On Sep 27, 2011

My dad invested in stocks in his day, and he never invested in a stock that didn’t pay dividends.

To that end, he looked for companies that offered stability and proof that they were in it for the long haul, which meant of course a lot of the blue chip stocks.

I think dividends and high payout ratios are good, but when I got into Internet investing during the “bubble” of the late 1990s, I didn’t pay any attention to dividends.

Most of the so-called “dot coms” didn’t pay dividends anyway. They rewarded shareholders with rapid stock appreciation, and windfalls from stock splits. That was before the bottom fell out of the market.

Today, I am a little wiser, and I try to balance out my portfolio with dividend paying stocks. Most of them have a dividend payout ratio of 30%, which is fine with me.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.