What is the Dividend Payout Ratio?

The Dividend Payout Ratio represents the percentage of a company’s earnings/profits that they pay-out to shareholders in the form of dividends.

Companies with higher dividend payout ratios tend to be older, more well-established corporations with long histories of dividend payments. Newer, more growth oriented companies will tend to take earnings and reinvest them in the company, whether via additional fixed investment, inventory expansions, hiring more people, or entering new markets.

As such, a having a higher dividend payout ratio does not necessarily mean a company is stronger, or that it has a better chance of growth. In fact, often times the opposite is true.