Foolish Fundamentals: Payout Ratios

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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 $1.43 per share in dividends over the trailing 12 months ended Aug. 1, 2007. Over the same time period, Heinz posted diluted earnings per share (EPS) of $2.41. Dividing $1.43 by $2.41 produces a payout ratio of 59%.

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 - just less than its industry average.

For comparison's sake, here are some recent payout ratios for other companies, based on their last-12-month (LTM) results.

For more on dividends:

• Speaking Mathanese: The Dividend Yield
• Dividend Taxes