"Payout Ratios" Explained

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

A payout ratio is 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 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.

Here are recent payout ratios for some companies:

For more on dividends:

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