The dividend payout ratio measures the proportion of a company's earnings that is distributed to shareholders as dividends. It is a key indicator of dividend sustainability and management's capital allocation strategy. A company that pays out too much of its earnings may struggle to maintain the dividend during economic downturns, while a company that retains most of its earnings has more flexibility for reinvestment and growth.

The formula is: Payout Ratio = (Annual Dividend per Share / Earnings per Share) x 100. The retention ratio is the inverse: Retention Ratio = 100% - Payout Ratio. The dividend coverage ratio is calculated as EPS / Dividend per Share, showing how many times earnings cover the dividend. A coverage ratio below 1.0x indicates the company is paying more in dividends than it earns, which is typically unsustainable long-term.

For example, if a company pays $2.40 in annual dividends per share and earns $5.00 per share, the payout ratio is 48%, the retention ratio is 52%, and the dividend coverage is 2.08x. This indicates a well-covered dividend that leaves room for reinvestment. Different industries have different norms: utilities and REITs often have higher payout ratios (60-90%), while technology companies tend to retain more earnings for growth.