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Payout Ratio — Is the Dividend Safe?

Overview

The payout ratio tells you what percentage of earnings a company pays as dividends. It's the single most important metric for assessing whether a dividend is sustainable or at risk of being cut. Learn to read the numbers behind the ratio in our income statement guide, then cross-reference with cash-flow analysis. For a more advanced multi-year approach, continue to Dividend Coverage Ratio & Free Cash Flow Analysis.

Key Takeaways

  • Payout ratio = dividends per share / earnings per share × 100.
  • Below 60% is generally safe; 60-80% is elevated; above 80% is a warning sign.
  • REITs and MLPs have higher normal payout ratios (70-90%) due to their structure.
  • Free cash flow payout ratio is more reliable than earnings payout ratio.

Practical Tips

  • Check the 5-year payout ratio trend — a rising ratio with flat earnings is a red flag.
  • Compare payout ratios within the same sector — what's normal for utilities differs from tech.
  • If a company's payout ratio exceeds 100%, it's paying more than it earns — unsustainable.

More Analysis Guides

Dividend Coverage Ratio & Free Cash Flow Analysis

Go beyond the basic payout ratio with dividend coverage analysis. Free cash flow coverage, debt service coverage, and multi-year trend analysis reveal the true sustainability of a dividend. Ground your numbers using our <a href="/academy/fundamental-analysis/cash-flow-statement-deep-dive" class="text-primary hover:underline">cash-flow statement deep dive</a> and review earnings trends in the <a href="/academy/fundamental-analysis/reading-an-income-statement" class="text-primary hover:underline">income statement guide</a>. Quickly surface at-risk payers by running coverage filters in the <a href="/tools/screener" class="text-primary hover:underline">stock screener</a>.

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