What Is a Payout Ratio?
Very often you may hear the media speak of payout ratios when discussing income trusts. The ratio is sometimes used to judge an income trust’s health. A payout ratio is calculated by dividing a trust’s annual distribution by annual earnings. Restaurant royalty trusts tend to have higher payout ratios than regular business trusts since restaurant royalty trusts are not exposed to operating and capital expenditure requirements.
One of the factors to consider when investing in stocks is whether a company you invest in pays a dividend or not. A dividend is when a part of the company’s earnings are given back to the shareholders, depending on how many shares they own. Usually, not all the earnings are given back, but rather just a percentage of them. This percentage is what the payout ratio consists of. Also called a dividend payout ratio, it is calculated as the yearly dividend paid per share, divided by the earnings per share during the same year. A payout ratio can be anywhere between zero and 100%. If the payout ratio is zero, this means there is no dividend paid to the shareholders. Many stocks do not pay yearly dividends, so a ratio of zero is not uncommon. A 100% payout ratio means that all the company’s earnings are given to the shareholders, who are technically the company’s owners. A relatively high payout ratio may indicate that little or no expansion is to be expected from the company in the near fut
