Payout ratio
The share of a company's earnings being returned to shareholders as dividends.
Payout ratio is total dividends paid divided by net earnings, over a defined period (usually one year). It is the most common sustainability test for a dividend.
Rules of thumb (very loose, by sector): - **Below 50%** — comfortable; lots of room to keep paying through a bad year. - **50–75%** — typical for mature dividend payers in stable industries. - **Above 75%** — getting tight; one weak year of earnings could force a cut. - **Above 100%** — the company is paying out more than it earns; sustainable only via debt, asset sales, or temporary EPS dips.
It's not the only check. A company can have a 90% payout ratio and still be safe (predictable cash flow, low capex needs — utilities, REITs); another can have a 40% ratio and cut anyway (cyclical industry, debt maturity wall).
Pair it with **coverage ratio** for a more honest read.