To calculate a dividend payout ratio, divide dividends per share by earnings per share, or total dividends paid by net income. Procter & Gamble ($PG) declared $4.2589 a share in dividends in its fiscal year ended June 30, 2026 against diluted earnings of $6.62, a payout ratio of 64.3%, according to its annual report. Then run the same check against free cash flow, because earnings and cash can tell different stories: Coca-Cola ($KO) paid out 67% of its 2025 earnings but about 166% of its free cash flow. A payout ratio is the quickest test of dividend safety, but only if you calculate both versions and know when one is distorted.

The two formulas

The earnings payout ratio is the standard one:

• Per share: dividends per share ÷ earnings per share × 100.
• In total: dividends paid ÷ net income × 100.

The two should come out close. They differ slightly because the share count changes during the year.

The cash payout ratio replaces earnings with free cash flow:

• Free cash flow: cash from operating activities − capital expenditures.
• Cash payout ratio: dividends paid ÷ free cash flow × 100.

Dividends are paid in cash, not in accounting earnings, so the cash version is the stricter test. Every figure you need is in the company's annual report on Form 10-K: net income and earnings per share in the income statement, operating cash flow, capital spending and dividends paid in the cash flow statement.

Example 1: Procter & Gamble, a clean case

From P&G's Form 10-K for the fiscal year ended June 30, 2026, filed August 4, 2026:

• Dividends declared per share: $4.2589. Diluted earnings per share: $6.62.
• Earnings payout: $4.2589 ÷ $6.62 = 64.3%.
• Dividends paid: $10.23 billion. Net income: $16.05 billion. Total payout: 63.8%.
• Operating cash flow: $19.56 billion. Capital spending: $4.41 billion. Free cash flow: $15.15 billion.
• Cash payout: $10.23 billion ÷ $15.15 billion = 67.6%.

The two ratios agree, both in the mid-60s. That is the pattern of a steady consumer business: earnings convert to cash, and about two-thirds of it goes to shareholders as dividends. At the November 2, 2026 close of $163.56, the fiscal 2026 dividend is a yield of about 2.6%.

Example 2: Coca-Cola, when cash and earnings disagree

From Coca-Cola's Form 10-K for 2025, filed February 20, 2026:

• Net income: $13.11 billion. Dividends paid: $8.78 billion. Earnings payout: 67.0%.
• Dividends paid per share: $2.04. Earnings per share (net income ÷ 4.313 billion diluted shares): about $3.04. Per-share payout: 67.1%.
• Operating cash flow: $7.41 billion. Capital spending: $2.11 billion. Free cash flow: $5.30 billion.
• Cash payout: $8.78 billion ÷ $5.30 billion = 165.8%.

On earnings, Coca-Cola's dividend looks comfortably covered. On cash, the company paid out far more than it generated that year. A gap this wide does not prove the dividend is in danger. It means something moved cash flow away from earnings, and the reason is in the cash flow statement and its notes. Read them before drawing a conclusion.

The lesson is general: a single year's cash payout can be distorted by one-off payments, tax timing or working capital swings. Look at three to five years before deciding whether a gap is a trend or an event.

Example 3: Johnson & Johnson, when one year's earnings jump

Earnings can be distorted too. From Johnson & Johnson's Form 10-K for 2025, filed February 11, 2026:

• Dividends paid per share: $5.14. Diluted earnings per share: $11.03.
• Earnings payout: $5.14 ÷ $11.03 = 46.6%.
• The year before: $4.91 ÷ $5.79 = 84.8%.

Earnings per share nearly doubled in one year while the dividend rose modestly, so the payout ratio fell by almost half. A ratio that drops that fast usually reflects an unusual item in earnings rather than a sudden improvement in dividend safety. Check the income statement for gains or charges that will not repeat, and compare with the cash payout, before treating the lower ratio as the new normal.

A five-minute check on any dividend stock

• Open the latest 10-K on EDGAR. Search the company name on the SEC's site and filter for annual reports.
• Find earnings per share in the income statement and dividends per share, usually in the notes or the shareholder equity statement.
• Divide one by the other. That is the earnings payout.
• Find operating cash flow, capital expenditures and dividends paid in the cash flow statement. Subtract capital spending from operating cash flow, then divide dividends paid by the result. That is the cash payout.
• Repeat for the two prior years, which the same 10-K usually shows side by side.

Three years of both ratios on one page tells you more than any single figure. Consistent numbers in a sensible range point to a well-covered dividend; a rising trend, or a cash payout persistently above the earnings payout, points to the need for a closer look at the business.

What a "good" payout ratio is

There is no single safe number. It depends on the business:

• Steady consumer staples can sustain higher ratios because their earnings are predictable.
• Cyclical companies need lower ratios to survive a bad year without cutting.
• Real estate investment trusts are usually judged on funds from operations instead, because depreciation depresses their accounting earnings and tax rules require them to distribute most of their taxable income.

The more useful questions are relative. Is the ratio rising over several years? Is the cash payout consistently above the earnings payout? Is the dividend growing faster than earnings? Any of those is a reason to look harder.

Common mistakes

• Using one year. A single year can be distorted, as the Coca-Cola and Johnson & Johnson examples show.
• Using adjusted earnings without checking. Many companies report adjusted figures that exclude certain costs. They can be useful, but the reported figures in the 10-K are the starting point.
• Ignoring buybacks. A company paying 60% of earnings in dividends and another 50% in buybacks is returning more than it earns.
• Mixing up declared and paid. Dividends declared in a year and dividends paid in a year can differ because of timing. Use the same basis on both sides of the ratio.

For a worked example of a company returning almost all its free cash flow, see Cisco's dividend and buyback math, and for a long-running dividend record, whether Clorox is a Dividend Aristocrat. More income ideas are in Dividends and on the front page.

FAQ

How do you calculate the dividend payout ratio?

Divide dividends per share by earnings per share and multiply by 100. Procter & Gamble's fiscal 2026 dividend of $4.2589 against earnings of $6.62 gives a payout ratio of 64.3%.

What is the difference between the payout ratio and the cash payout ratio?

The payout ratio compares dividends with earnings. The cash payout ratio compares them with free cash flow, operating cash flow minus capital spending. The cash version is stricter because dividends are paid in cash.

Is a payout ratio above 100% bad?

It means the company paid more in dividends than it earned that year. For one year it can reflect a temporary dip in earnings; if it persists, the dividend depends on borrowing or savings, which is not sustainable.

Where do I find the numbers?

In the company's annual report on Form 10-K, available free on the SEC's EDGAR system: earnings per share and net income in the income statement, dividends paid and cash flows in the cash flow statement.