Payout ratio

The payout ratio is the proportion of earnings paid out as dividends, equal to dividends per share divided by earnings per share. Its complement, the retention ratio, is the share of profit reinvested to fund future growth.

ByHoang TruongUpdated July 2, 2026

FrameworkDividend policy

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A company earning €3.00 per share pays out €1.20 as dividend and retains €1.80 for reinvestment — a payout ratio of 40 per cent and a retention ratio of 60 per cent. The two figures always sum to the whole. Under the Gordon growth model, that 60 per cent retention multiplied by return on equity sets the firm's sustainable growth rate.

Where it fits

SubjectCorporate FinanceCoreTopicDividend Policy & PayoutCore

The formula

LaTeX

\text{Payout ratio} = \frac{\text{DPS}}{\text{EPS}}

Variables

$D P S$: Dividends per share declared for the period
$E P S$: Earnings per share for the same period
$P a y o u t r a t i o$: Proportion of earnings distributed as dividends (expressed as a decimal or percentage)

Retention ratio = 1 − Payout ratio. The two figures always sum to 1 and describe how a firm splits its earnings between current income for shareholders and capital retained for reinvestment.

LaTeX

g = \text{Retention ratio} \times \text{ROE}

Variables

$g$: Sustainable earnings growth rate per period
$R e t e n t i o n r a t i o$: Proportion of earnings retained and reinvested (= 1 − Payout ratio)
$R O E$: Return on equity

From the Gordon growth model: a firm can only grow sustainably as fast as the product of how much profit it retains and how productively it deploys that retained capital.