Please ensure Javascript is enabled for purposes of website accessibility

"Payout Ratios" Explained

By Motley Fool Staff – Updated Nov 16, 2016 at 11:54AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The payout ratio puts your company's dividend in context -- it's good to know.

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:

Company Payout Ratio
Microsoft (NASDAQ:MSFT) 13%
Wal-Mart (NYSE:WMT) 22
McDonald's (NYSE:MCD) 24
ExxonMobil (NYSE:XOM) 40
Coca-Cola (NYSE:KO) 47
General Electric (NYSE:GE) 51
Dow Chemical (NYSE:DOW) 61

For more on dividends:


Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.