Dividend Payout Ratio: What Does It Mean?

The dividend payout ratio is the percentage of a company's earnings that it pays out to shareholders as dividends. It's calculated by dividing the annual dividend per share by the earnings per share. A high payout ratio means the company is returning most of its profits to investors, while a low ratio suggests it's reinvesting more earnings back into the business. A ratio above 100% means the company is paying out more than it earns, which can be a warning sign that the dividend may not be sustainable. Investors use the payout ratio to evaluate the health and reliability of a company's dividend before investing for income.