Foolish Fundamentals: Payout Ratios

If you're an investor interested in dividends, you should understand the dividend payout ratio.

A payout ratio is the percentage of net income a company pays out to shareholders as a dividend. For example, H.J. Heinz (NYSE:HNZ) has paid out $1.16 in dividends per share over the past 12 months ended Oct. 26, 2005. Over the same time period, Heinz has sported earnings per share (EPS) of $2.06. Therefore, its payout ratio is 56% -- a figure derived from dividing $1.16 by $2.06.

This ratio 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, since reinvested earnings would sometimes return less than shareholders could get by investing the payout on their own. But in general, a high payout ratio means you probably shouldn't expect rapid growth at the company. For a company like Heinz, analysts expect it to grow by only 7% over the next five years, yet that's right around the industry average.

For comparison's sake, here are some recent payout ratios for other companies.

For more on dividends:

• Fun With Dividends
• Pay Up, Mr. Softy
• A $75 Billion Payday

Heinz and Alltel areMotley Fool Income Investorrecommendations. Coca-Cola and Microsoft areMotley Fool Inside Valuepicks.

Selena Maranjian, Shruti Basavaraj, and Adrian Rush contributed to this article.