UK Accounting Glossary
The dividend payout ratio is the percentage of a company’s annual earnings paid out as cash dividends. Dividend payout ratios vary by industry and are affected by market conditions and tax law. Moreover, both a low dividend payout ratio and a high dividend payout ratio can have good or bad implications. A low dividend payout ratio can indicate a fast-growing company whose shareholders willingly forego cash dividends, because the company uses the extra money to generate higher returns and, in turn, a high stock price. But a low dividend payout ratio can also point to a company that simply can’t afford to pay dividends. Similarly, a high dividend payout ratio can indicate a blue-chip that pays high dividends and whose stock price is temporarily depressed. But a high dividend payout ratio can also point to a mature company with few growth opportunities. Certainly, other conclusions can be drawn from both a low dividend payout ratio and a high dividend payout ratio, and the dividend payout ratio should thus be considered with other financial indicators when picking stocks.
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This glossary post was last updated: 9th February 2020.