Dividend Payout Ratio Law and Legal Definition
Dividend-payout ratio is a profitability ratio and is measured as a percentage of a company's net income that is returned to shareholders in the form of dividends.
Payout ratio is measured on a per share basis and is calculated by dividing the amount of dividend per share by the earnings per share. For example, a stock paying a $ 1 annual dividend and earning $ 2 per share has a payout ratio of 50%.
A higher ratio indicates that a company pays more in dividends and thus reinvests less of its earnings into the company. Investors tend to prefer a higher payout ratio in a slow-growing company and a lower one in a fast-growing company.