Payout Ratio

The payout ratio is the percentage of net income that a company pays out as dividends to common shareholders.

A payout ratio of 10% means for every dollar in Net Income, 10% is being paid out as a dividend. For instance, if Microsoft earns $50 million in net income and the payout ratio is 25%, Microsoft will offer $12.5 million to all its common shareholders.

Companies with low payout ratios:
- High growth companies often have low payout ratios; they use the money to invest in other projects
- Companies that do not have positive cash flow or positive earnings

Companies with high payout ratios:
- Value-orientated companies
- Where the board and management may own stock and pay dividends to themselves
- Where management is favorable to shareholders
- Companies that have a consistent dividend stock policy
- Companies that do not have any investment projects that are worth pursuing

Payout Ratio = Total Dividends Paid (TTM) / Net Income (TTM)