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, Income Investor pick H.J. Heinz (NYSE:HNZ) paid out $1.25 in dividends per share over the trailing 12 months ended Aug. 2, 2006. Over the same time period, Heinz posted diluted earnings per share (EPS) of $2.02. Dividing $1.25 by $2.02 produces a payout ratio of 62%.

This ratio shows what the company is doing with its money. If a company is returning 75% of its earnings to shareholders, for example, it's not reinvesting much in its 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 that you probably shouldn't expect rapid growth at the company. Analysts expect Heinz to grow by only 7% over the next five years -- right around the industry average.

For comparison's sake, here are some recent payout ratios for other companies, based on their most recent fiscal-year results.


Payout ratio (%)

Coca-Cola (NYSE:KO)


Microsoft (NASDAQ:MSFT)




Alltel (NYSE:AT)




Boeing (NYSE:BA)


Wal-Mart (NYSE:WMT)


Data provided by Capital IQ, a division of Standard and Poor's.

For more on dividends:

Heinz and Alltel are Motley Fool Income Investor recommendations. For more great dividend-paying companies, try the premium newsletter service free for 30 days .

Coca-Cola and Microsoft are Motley Fool Inside Value picks.

Shruti Basavaraj, Adrian Rush, and Katrina Chan contributed to this article, which was originally published by Selena Maranjian. Shruti owns shares of Microsoft. The Motley Fool has a full disclosure policy .