Dividend Payout Ratios Defined & Discussed

What Is a Dividend Payout Ratio & Why Should I Care About It?

By Jason Hall – Updated Oct 10, 2025 at 2:33 AM

Key Points

Dividend payout ratio reflects the % of earnings paid as dividends, guiding investment decisions.
A lower dividend payout ratio suggests greater company potential to grow and increase dividends.
Historically, stocks with moderate payout ratios have outperformed those with high ratios.

Dividend stocks can be a great way to generate passive income. The best ones consistently increase their dividends per share each year.

However, not all companies can routinely increase their dividends. One differentiating factor is the dividend payout ratio. Here's a closer look at this crucial metric for dividend investing.

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Dividend payout ratio equals total annual dividend payments divided by annual earnings. — Image source: The Motley Fool.

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Dividends Per Share

The dividends a company pays out per share and a commonly used per-share metric.

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Data source: Ned Davis Research and Hartford Funds.
Grouping	Annual Average Returns (1973-2022)
Dividend growers and initiators	10.24%
Equal-weighed S&P 500 Index	7.68%
No change in dividend policy	6.6%
Dividend cutters and eliminators	3.95%

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As the table shows, companies that made no change to their dividend policy (i.e., they maintained their payout level) and those that either cut or eliminated their dividends have underperformed the S&P 500 over the past several decades.

On the other hand, companies that recently initiated a dividend and those that have consistently increased their dividends -- such as Dividend Achievers and Dividend Kings -- have outperformed the S&P 500 over the long term. That's why investors should seek out companies with a lower dividend payout ratio instead of a higher yield since they're more likely to increase their payouts.

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About the Author

Jason Hall is a contributing Motley Fool stock market analyst with more than a decade of experience writing about dividend stocks and long-term investing. He has been with the company since 2012 and previously spent over 10 years in technical sales in the printing and information services industry. Jason also founded and operated a small food manufacturing business.

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Jason Hall has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple. The Motley Fool has a disclosure policy.