What is Dividend Payout Ratio and why is it important?

A dividend is the distribution of a company’s earnings to its shareholders and is determined by the board of directors in the dividend payer company. With other words, companies share some of their earnings with their shareholders by paying dividends. Dividend Payout Ratio tells you which fraction of company’s earnings is paid in the form of dividends. By looking at the Dividend Payout Ratio, dividend investors can evaluate whether the dividend payer company’s dividend payment program is sustainable.

But... How do you calculate Dividend Payout Ratio? How should you evaluate numbers when taking your investment decision? Which dividend payout ratio is good for investment purposes? Is it always good if a company pays out all its earnings as dividend? What does it mean when a dividend payout ratio is too low or even negative?

I tried to answer these questions in a blog post. Dividend investors may find it useful.

Another, tax-advantaged, way for a company to return money to shareholders is through share buybacks. Investors should add net buybacks to dividends to assess how much a company is "yielding".

A company should be reinvesting most profits when there are strong growth opportunities (for example Tesla), and paying out most profits when there are not (for example tobacco companies).