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Payout ratio vs dividend yield

Published August 17, 2026

Payout is dividends over net income. On $18,000 of dividends and $45,000 of profit it is 40 percent. Dividend yield is cash over price. A $2.00 dividend on a $41.60 Gordon price is 4.81 percent trailing, on a different firm.

	Payout ratio	Dividend yield
Formula	Dividends / net income.	Dividend / price.
Teaching sheet	$18,000 over $45,000 is 40 percent. ROE is 15 percent on $300,000 of equity.	A $2.00 dividend on a $41.60 Gordon price is 4.81 percent trailing and 5 percent implied.
Zero cash paid	$0 of dividends on $60,000 of profit is a 0 percent payout. Retention is 100 percent.	Yield is also zero if nothing was paid, whatever the price was.
Half paid	$40,000 on $80,000 of profit is a 50 percent payout. ROE is 20 percent on $400,000 of equity.	A higher payout is not automatically a higher yield. The Gordon sheet's 5 percent implied is $k - g$ , not this 50 percent.
What it is not	A yield. A firm can pay 40 percent of earnings and still print a low yield if the price is high.	A payout. Yield is silent on how large profit was.

Cash over profit is not cash over price

The payout ratio asks what share of this year's profit was sent to shareholders as a dividend:

$\text{Payout} = \frac{\text{Dividends}}{\text{Net income}}$

On $18,000 of dividends against $45,000 of net income that is 40 percent. Retention is 60 percent. Return on equity on $300,000 of book equity is 15 percent. Sustainable growth on that sheet is 9 percent.

Dividend yield lives on a different firm. A $2.00 dividend just paid, growing at 4 percent, with a 9 percent required return, is a $2.08 next dividend and a $41.60 Gordon price. Trailing yield is 4.81 percent. Implied yield is 5 percent, equal to $k - g$ . Do not paste that price onto the DuPont residual.

How the payout ratio works owns the 40 percent. How dividend yield works owns the 4.81 percent. How sustainable growth works owns $g = \text{ROE} \times b$ .

A firm can pay 40 percent of earnings and still print a low yield if the price is high, or a high yield if the price collapsed.

A zero payout is a policy, not a missing yield

Net income $60,000, dividends $0, equity $600,000. Payout is 0 percent. Retention is 100 percent. ROE is 10 percent. Paying nothing is a payout of zero, not a missing ratio. Yield on a sheet that takes a price would also be zero, because the cash numerator is zero.

The third sheet pays half: $40,000 of dividends on $80,000 of profit, a 50 percent payout, 50 percent retention, 20 percent ROE on $400,000 of equity. Ranking on payout and ranking on ROE reverse relative to the first sheet.

Dividend yield against earnings yield is cash over price against profit over price. This page is cash over profit. This is educational material, not financial advice.

Worked examples

40 percent on the DuPont residual

Net income is $45,000, dividends are $18,000, and book equity is $300,000. What is the payout ratio?

Payout: $18000 / 45000 = 0.4$ , which is 40 percent.
Retention is 60 percent, because $100 - 40 = 60$ .
ROE: $45000 / 300000 = 0.15$ , which is 15 percent.
Sustainable growth is 9 percent. This page owns the 40 percent payout.

Payout is 40 percent. Retention is 60 percent. ROE is 15 percent. Sustainable growth is 9 percent. Net income is $45,000, dividends $18,000, equity $300,000.

Zero dividends on \$60,000 of profit

Net income is $60,000, dividends are $0, equity is $600,000. What is payout?

Payout: $0 / 60000 = 0$ , which is 0 percent.
Retention is 100 percent.
ROE: $60000 / 600000 = 0.1$ , which is 10 percent.
Sustainable growth is 10 percent, equal to ROE because retention is 100 percent.

Payout is 0 percent. Retention is 100 percent. ROE is 10 percent. Sustainable growth is 10 percent. Net income is $60,000, dividends $0, equity $600,000.

50 percent on \$80,000 of profit

Net income $80,000, dividends $40,000, equity $400,000. What is payout?

Payout: $40000 / 80000 = 0.5$ , which is 50 percent.
Retention is 50 percent.
ROE: $80000 / 400000 = 0.2$ , which is 20 percent.
Sustainable growth is 10 percent.

Payout is 50 percent. Retention is 50 percent. ROE is 20 percent. Sustainable growth is 10 percent. Net income is $80,000, dividends $40,000, equity $400,000.

4.81 percent trailing on the Gordon sheet

The dividend just paid is $2.00. Growth is 4 percent forever. Required return is 9 percent. What is the price, and what are the two yields?

Next year's dividend: $2.00 \times 1.04 = 2.08$ , so $2.08.
Price: $2.08 / (0.09 - 0.04) = 2.08 / 0.05 = 41.60$ , so $41.60.
Implied yield is $2.08 / 41.60 = 0.05$ , 5 percent, equal to $9 - 4$ .
Trailing yield is $2.00 / 41.60$ , 4.81 percent.

The price is $41.60. Next year's dividend is $2.08. Implied yield is 5 percent. Trailing yield, on the $2.00 just paid, is 4.81 percent. This is not the DuPont payout firm.

Common questions

Is payout the same as dividend yield?

No. Payout is cash over profit. Yield is cash over price. The first sheet pays 40 percent of $45,000. The Gordon sheet yields 4.81 percent trailing on a $2.00 dividend and a $41.60 price. Different firms.

Can a 40 percent payout sit next to a 4.81 percent yield?

Yes, because they are different fractions on different sheets. Payout here is $18,000 over $45,000. Yield on the Gordon sheet is $2.00 over $41.60. Do not mash those dollars.

What if dividends are zero?

Payout is 0 percent and retention is 100 percent. That is a policy, not a missing ratio. On the second sheet ROE is 10 percent on $60,000 over $600,000, and all of it is kept.

Keep reading

This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.