Comprehensive Guide
Learn more in our Investing Guide.
How it works
A payout ratio is the fraction of company profits paid out as dividends — the single most predictive simple stat for dividend survival, because a board distributing more than it earns is scheduling a future cut. This screener computes it twice on purpose. The earnings payout ratio (dividend ÷ EPS) is the headline version, but accounting earnings bend with depreciation schedules, impairments and one-off charges. The free-cash-flow payout ratio (dividend ÷ FCF per share) asks the harder question: after actual cash left for factories, networks and inventories, did enough remain to cover the check? When the two diverge sharply — say a 50% earnings payout beside a 90% FCF payout — the dividend is being financed by borrowing or asset sales, which ends predictably. The screener grades the tighter of the two measures, reports earnings coverage as a clean multiple, and sizes the maximum dividend the company could sustain before either measure hits 100%. One year proves nothing: screen the trend across at least five annual reports before trusting the verdict.Formula
Earnings payout = DPS ÷ EPS × 100 | FCF payout = DPS ÷ FCF/share × 100 | Coverage = EPS ÷ DPS
Tips
- Below 60% on both measures is the classic comfort zone for durable payers.
- FCF payout above 90% means the dividend survives only while credit stays cheap.
- Compare against the company's own 5-year history, not just peers.
- REITs and MLPs play different rules — judge them on AFFO instead of EPS.
- A rising ratio with flat dividend signals earnings trouble ahead of any cut.
Frequently asked questions
What is a safe payout ratio for dividends?
For ordinary industrial and consumer companies, 40–60% of earnings is traditionally considered safe, leaving room for recessions and reinvestment. Above 80% the margin thins; above 100% the company pays out more than it earns and something must give. Free-cash-flow versions run slightly higher tolerances since depreciation depresses EPS but not cash.
Why use free cash flow payout instead of earnings payout?
Because cash pays dividends, not accounting profit. Earnings can be inflated by non-cash items or crushed by paper charges that never touch the dividend's funding. A company showing a 55% earnings payout but a 95% FCF payout is effectively borrowing to maintain its distribution — the FCF lens catches what the earnings lens hides.
Can a payout ratio be over 100%?
Yes, and it is a red flag whenever sustained. The company distributes more than it earns or generates in cash, bridging the gap with debt, asset sales or reserves. Occasional spikes during one bad year happen even at healthy payers; consecutive years above 100% historically precede freezes or outright cuts.
What payout ratio is too high for REITs?
REITs routinely exceed 80–90% of earnings because required property depreciation suppresses reported EPS far below true cash generation. That is why REIT analysis substitutes AFFO (adjusted funds from operations) payout ratios, where 70–85% is normal and healthy. Screening a REIT on plain EPS payout will wrongly condemn almost every member of the sector.
Does a low payout ratio guarantee dividend growth?
No — it guarantees capacity, not intent. Management may hoard the retained 70% for acquisitions, debt paydown or buybacks for years. Low payout combined with rising earnings and a stated capital-return policy is the actual recipe; low payout alone just means the dividend is unlikely to be cut tomorrow.