What is a dividend payout ratio?

The dividend payout ratio is defined as the fraction of earnings that a company pays to its shareholders in the form of dividends. This metric is significant as it helps investors understand how much profit is being returned to shareholders compared to how much is being retained for reinvestment in the business. A higher payout ratio may indicate that a company is returning a substantial portion of its profits to shareholders, which could be attractive to income-focused investors. Conversely, a lower payout ratio may suggest that the company is reinvesting more for growth, which can be an appealing strategy for investors looking for long-term capital appreciation. This concept is essential in financial analysis as it provides insight into a company's financial health and its approach to managing profits.