Dividend Payout Ratio
The dividend payout ratio, which is the percentage of earnings paid out as dividends, is a key metric in this trade-off.
A higher payout ratio indicates that a larger portion of earnings is being gallopingvideo.com distributed to shareholders rather than being reinvested in the business.
While this provides immediate income to shareholders, it can limit the company’s growth potential.
- Example: A company with a payout ratio of 80% allocates most of its earnings to dividends, leaving only 20% for reinvestment. This high payout ratio can constrain the company’s ability to fund growth initiatives.