Payout ratio is a measure of what
proportion of
total earnings a
company pays out in
dividends.
It is calculated by dividing the amount of money paid
out as
dividends by the total
earnings
of the company. It is the
inverse of the
dividend
cover.
For example, suppose the company XYZ has earnings of
$150000000 and pays out $20000000 as dividends:
Payout Ratio = Dividends / Total Earnings
= $20000000 / $150000000
= 0.1333
= 13.33%
A company with a high payout ratio can be considered
an "
income investment". A company with a low
payout ratio would probably be a "
growth investment",
because if the company invests the
retained earnings
well, the
share price will go up as the
shareholders
equity goes up.