Lesson 4.1 · 1 of 5 · Dividends in depth
Dividend payout ratio: how to calculate it, with real examples
The payout ratio shows what share of its net profit a company pays out as dividends. Divide the dividend per share by earnings per share. Above 100% means the company paid out more than it earned: a warning sign worth checking, not automatically a bad one. The sector and free cash flow both matter.
Terms in this lesson
- Payout ratio
- The part of profit that goes to shareholders as dividends.
- EPS
- The company's net profit divided by the number of shares.
- Free cash flow (FCF)
- The cash left to the company after it pays for its investments.
- REIT
- A listed company that owns rented buildings and pays out almost all its profit as dividends.
How to calculate the payout ratio
Definition
What is the formula?
Dividend per share ÷ earnings per share × 100.
You get the same answer from the totals: dividends paid to shareholders ÷ net profit. Whatever isn’t paid out stays in the company for investment, paying down debt or buybacks. Example: in 2025 Coca-Cola paid a dividend of $2.04 a share on earnings per share of $3.04. Its payout ratio was 67%.
Coca-Cola: 2.04 ÷ 3.04 = 67%. A third of the profit stayed in the business.
Watch out
Which profit are you using?
Coca-Cola, 2024: 79% on reported profit, 67% on adjusted profit.
In 2024 Coca-Cola paid $1.94 a share. Reported earnings were $2.46, dragged down mainly by a $3.1 billion accounting charge linked to its purchase of fairlife; the company’s adjusted (comparable) figure, which leaves out items like this, was $2.88. The same dividend gives two ratios: 1.94 ÷ 2.46 = 79% and 1.94 ÷ 2.88 = 67%. Whenever you see a payout ratio, ask first which profit it is based on.
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Create a free accountPayout ratio based on free cash flow
Definition
Why a second version?
Dividends paid ÷ free cash flow × 100.
Profit is an accounting figure; dividends are paid in cash. Free cash flow (operating cash flow minus spending on property and equipment) shows how much money was actually left over. At Apple in financial year 2025: $111,482 million - $12,715 million = $98,767 million of free cash flow, of which dividends of $15,421 million took 15.6%.
Real case
Duke Energy, 2025: dividend covered by profit, not by free cash flow
Duke Energy, a US electricity and gas utility, paid out 67% of its profit as dividends ($3,290 million out of $4,912 million). But capital spending of $14,024 million was larger than operating cash flow of $12,330 million, so free cash flow was negative: -$1,694 million. In effect the dividends were funded by borrowing: the company issued $11,891 million of new long-term debt in 2025. For utilities this is a normal model, because investment is heavy and income is regulated. The risk shows up if interest rates rise or lenders become more cautious.
Payout ratio above 100%: what to check
A one-off charge or a bad year. If free cash flow covers the dividend, a company can ride out a single year.
It pays out more than it earns year after year. The gap is filled from reserves or borrowing, and both run out.
At REITs, depreciation on buildings cuts accounting profit sharply. Another measure is used there.
Payout ratios by sector: utilities, REITs, tech
| Company | Sector | Ratio on profit | What to know |
|---|---|---|---|
| Apple (FY2025) | Technology | 13.7% | Returns more through buybacks |
| Coca-Cola (2025) | Drinks | 67% | Steady business, slow growth |
| Duke Energy (2025) | Utilities | 67% | Negative free cash flow, investment funded by debt |
| Realty Income (2025) | REIT | 275% | On AFFO: 75% |
Calculated from the companies’ annual reports (financial year in brackets). US REITs must distribute at least 90% of their taxable income to keep their status, according to the IRS instructions for Form 1120-REIT.
There is no “right” payout ratio for every company. A fast-growing business needs cash to invest and pays little or nothing. A mature business with steady profit can afford to hand back a larger share. Compare the ratio with companies in the same sector and with the same company’s own history.
Lessons are educational. They are not a recommendation to buy or sell. Investing involves risk and you can lose money. Sources: Apple, Form 10-K for financial year 2025 (diluted EPS $7.46, dividends declared $1.02 a share, net income $112,010 million, operating cash flow $111,482 million, capital spending $12,715 million, dividends paid $15,421 million, buybacks $90,711 million); Coca-Cola, Forms 10-K for 2025 and 2024 (dividends $2.04 and $1.94 a share, diluted EPS $3.04 and $2.46, 2023 cash flow) and full-year 2024 results (comparable EPS $2.88, $3.1 billion fairlife charge, $6.0 billion IRS deposit) and 2025 results ($6.1 billion fairlife payment); Duke Energy, Form 10-K for 2025 (net income available to common stockholders $4,912 million, common dividends $3,290 million, operating cash flow $12,330 million, capital expenditure $14,024 million, long-term debt issued $11,891 million); Realty Income, full-year 2025 results (24 February 2026, SEC): net income $1.17, AFFO $4.28, dividends $3.217 a share, 75.2% of AFFO; IRS, Instructions for Form 1120-REIT.