FOOL'S SCHOOL DAILY Q&A

The Payout Ratio

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By Selena Maranjian (TMF Selena)
October 8, 2002

Q. What's a company's "payout ratio"?

A. It's the percentage of net income a firm pays out to shareholders as a dividend. If Buzzy's Broccoli Beer (ticker: BRRRP) pays $1 per year in dividends and sports earnings per share (EPS) of $4, its payout ratio is 25% ($1 divided by $4 equals 0.25, or 25%).

This shows what the company is doing with its money. If you see that a company is returning 75% of its earnings to shareholders, then little is being reinvested in operations. That can be OK, as sometimes reinvested earnings would return less than what shareholders could get investing the payout on their own. But in general, a high payout ratio means you probably shouldn't expect rapid growth at the company.

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This question and answer is adapted from The Motley Fool Money Guide: Answers to Your Questions About Saving, Spending and Investing. For answers to this and 499 other common money questions, check it out -- it's a handy resource.