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Glossary
Income

Payout ratio

The share of profit handed out as dividends.

Below about 60% is generally comfortable, leaving room to reinvest and to keep paying through a bad year. Above 100% means the company is paying out more than it earns, funding the gap from cash reserves or borrowing.

A payout ratio above 100% is the single clearest early warning that a dividend cut is coming.

The formula
Payout ratio = Dividends per share ÷ Earnings per share
Figure

The divergence that precedes most disasters

Y1Y2Y3Y4Y5Reported profitOperating cash

Reported profit climbing while the cash it supposedly generated goes nowhere. Either customers are not paying, or the sales were never really made.

Why it matters

It tells you whether the dividend is affordable, which the yield never does.

The mistake everyone makes

Checking the yield and not the payout ratio, which is like checking the price and not the bill.

Related terms

Dividend yield
Annual dividend as a percentage of the share price.
Dividend cover
How many times over the company's earnings could pay the dividend.
EPS
Net profit divided by the number of shares, which is your slice of it.

See Payout ratio on a real company

SteadyShares pulls this straight from the filings for 1,100+ companies, alongside moat scores, DCF fair value and peer comparison. Free to look around.

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