The percentage of earnings paid out as dividends to shareholders, calculated by dividing dividends per share by earnings per share. It measures how much of a company's profits are distributed versus retained for reinvestment.
Combines 'dividend' from Latin, 'payout' from English 'pay out' (distribute), and 'ratio' from Latin 'ratio' (calculation). This metric became standard in financial analysis as dividend policy evaluation became more sophisticated in the mid-20th century.
A 100%+ payout ratio isn't necessarily unsustainable - companies sometimes pay dividends from cash reserves or borrowings during temporary earnings dips to maintain dividend consistency. However, it's definitely a yellow flag that warrants investigation!
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