Dividend Yield vs Payout Ratio
Many UK investors focus heavily on dividend yield, but yield alone does not tell you whether a dividend is safe. One of the most important — and often ignored — metrics is the payout ratio.
This page explains both metrics, how they relate to each other, and how to use them to identify sustainable dividends.
What Is Dividend Yield?
Dividend yield tells you how much cash a company pays out relative to its share price:
Dividend Yield = Annual Dividend per Share ÷ Share Price
Yields rise when:
- dividends increase
- share prices fall
Most dangerously, yields can appear high because the share price has collapsed, signalling distress.
What Is the Payout Ratio?
The payout ratio tells you what percentage of earnings a company pays out as dividends:
Payout Ratio = Dividends ÷ Earnings
A payout ratio shows whether the dividend is being paid from real profits.
Typical ranges:
- Under 50% – Very healthy
- 50–80% – Acceptable for stable businesses
- 80–100% – Risky
- Over 100% – Unsustainable: dividend is not funded by profits
Why Investors Must Look at Yield and Payout Ratio Together
A high yield with a high payout ratio is one of the strongest warning signs for a potential dividend cut.
| Yield | Payout Ratio | Interpretation |
|---|---|---|
| Low–Moderate | Low | Healthy and sustainable |
| High | Low–Moderate | Potential bargain — investigate further |
| High | High | Major warning sign — possible dividend cut |
| Moderate | Very high | Dividend may be at risk even with modest yield |
Sector Notes (UK)
Some sectors naturally have higher payout ratios or yields:
- REITs – Legally pay out most of their earnings; high yields normal
- Energy & miners – Cyclical earnings; variable payouts
- Banks – Moderately stable; yields vary with economic cycles
- Consumer staples & utilities – Tend to have steady payouts
Always interpret payout ratios in the context of the sector.
Interactive: Dividend Sustainability Checker
Enter a company's dividend yield and payout ratio for an instant assessment.
Summary
Yield tells you what you get; payout ratio tells you whether the company can afford it.
The best long-term dividend stocks often have:
- moderate yields
- strong and stable payout ratios
- consistent cash flow
Very high yields with high payout ratios are usually warning signals, not bargains.