The percentage of earnings paid out as dividends. Between 25-60% is the sweet spot: enough to reward shareholders while retaining capital for growth. Above 100% means dividends exceed earnings, which is unsustainable.
Formula
Description
The percentage of earnings paid out as dividends. Indicates dividend sustainability and how much profit is retained for reinvestment. Companies with moderate payout ratios can grow dividends and invest in the business simultaneously.
Interpretation
25-60% is the ideal range. Below 25% leaves significant room for increases. Above 75% may be unsustainable unless earnings are very stable (like utilities). A payout ratio above 100% means dividends exceed earnings, which requires borrowing or drawing down reserves.
Related Growth Indicators
Overhead costs (selling, general, and administrative expenses) as a percentage of revenue. Below 30% is generally efficient. Buffett notes that companies with consistently low SGA ratios tend to have durable competitive advantages.
Research and development spending as a percentage of revenue. The ideal range depends on industry: tech companies often spend 15-25%. Too little may mean underinvestment in the future; too much may burden profitability.
Total operating expenses divided by revenue. Below 0.8 indicates a healthy 20%+ operating margin. Above 1.0 means the company isn't covering operating costs with revenue. A declining ratio signals improving efficiency.
Total revenue divided by employee headcount. Measures workforce productivity and business scalability. Technology companies with platform models tend to lead. Above $300,000 is generally strong.
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