What is the payout ratio?
Dividends per share divided by earnings per share (or free cash flow per share). Measures what portion of profits is returned to shareholders via dividends; the primary signal of dividend sustainability.
Payout ratio equals total dividends paid divided by net income (or free cash flow). A 50% payout ratio means half of earnings goes to dividends, half is retained. A ratio above 100% means the dividend exceeds earnings and is being paid from cash reserves or debt: a clear warning sign. Sustainable ranges vary by industry: utilities and REITs run 60-90% comfortably, consumer staples 40-60%, software 0-30%, tech growth 0% (no dividend). Buffett and Munger both prefer companies that retain earnings at high ROIC over high-payout-ratio compounders.
How invest-like uses it
The payout ratio appears inside the Buffett-Fit financial-health pillar (high payout with weak cash conversion is a deal-breaker hint) and the Smith framework (Smith generally prefers buybacks at fair prices over dividend distributions). The ratio is also surfaced as context on every per-stock verdict page.
Cash-flow-based payout (dividends/FCF) is more informative than earnings-based payout (dividends/EPS) because cash flow is harder to manipulate than reported earnings. A company with a 60% earnings payout but a 95% FCF payout has a fragile dividend; the screen treats these as different situations.
Frequently asked questions
What is the payout ratio?
Dividends paid divided by net income (or free cash flow). The primary signal of dividend sustainability.
What's a safe payout ratio?
Industry-dependent. Utilities 60-90%, consumer staples 40-60%, software 0-30%, tech growth 0%. Above 100% is a warning sign.
Which is more informative: EPS or FCF payout ratio?
FCF payout. Cash flow is harder to manipulate than reported earnings, so the FCF-based ratio surfaces fragile dividends that an EPS-based ratio would miss.
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