What is a dividend payout ratio?

A dividend payout ratio is a financial metric that indicates the percentage of a company's earnings that is distributed to its shareholders in the form of dividends. It provides insight into how much of the net income is returned to investors and how much is retained for reinvestment in the company.

For example, if a company has earnings of $1 million and pays $300,000 in dividends, the dividend payout ratio would be 30%. This ratio is significant for investors as it reflects the company's policy on returning profits to shareholders, and it can also indicate the sustainability of the dividend — a high payout ratio may suggest that the company is prioritizing dividends over growth, while a low payout ratio may imply that the company is reinvesting its earnings for future expansions.

This concept is fundamental for evaluating the income potential of an investment and understanding the financial health of a company in terms of its willingness to share profits with investors.