Payout Ratio

Definition

The payout ratio indicates the proportion of the earnings of a company which are paid out to the shareholders as dividends. The payout ratio can be used by dividend investors to determine whether a company’s dividend payments are sustainable. Investors should be aware of investing in companies with a high payout ratio, as it could restrain future growth. The inverse of the payout ratio is the retention ratio – the percentage of earnings retained by the company to be reinvested.

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