Definition
Dividend Payout Ratio
The dividend payout ratio is the share of net profit a company distributes to shareholders as dividends, with the rest retained for growth.
Payout Ratio = Dividends / Net Profit. A payout of 30% means the company returns ₹30 of every ₹100 earned and reinvests ₹70. Mature, cash-rich firms (FMCG, utilities, many PSUs) often have high payouts, while fast-growing companies retain most earnings to fund expansion.
A sustainable payout matters: paying out more than profits (over 100%) or borrowing to pay dividends is a red flag. The retained portion fuels compounding of book value, so a moderate payout with high ROE can be ideal for long-term investors.
Related terms
- Return on Equity (ROE)ROE measures how much net profit a company earns for each rupee of shareholders' equity, showing how efficiently it puts owners' money to work.
- Dividend YieldDividend yield is the annual dividend per share divided by the share price, expressed as a percentage.
- Free Cash FlowFree cash flow is the cash a company generates after meeting operating expenses and capital expenditure — the surplus it can use to pay dividends, buy back shares, cut debt or grow.
Plain-English explainer from Investdesk Investors Encyclopedia. General information, not financial advice.