Glossary

Dividend payout ratio

The share of a company's profit it pays out as dividends.

The payout ratio divides dividends by net income (or dividends per share by earnings per share). A company that earns $4 a share and pays $1 has a 25% payout ratio.

A low ratio leaves room to raise the dividend or reinvest. A ratio near or above 100% means the company pays out everything it earns, or more, which cannot last unless profits grow.

Payout against free cash flow is often more telling than payout against profit, because dividends are paid in cash.

Try it: Dividend reinvestment calculator

  • Dividend yield: The dividends a share paid over a year, divided by its current price.
  • Free cash flow: The cash a business produces from its operations after paying for the investment it needs to keep going.

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