What Is a Payout?
Payouts refer to the expected financial returns or monetary disbursem*nts from investments or annuities.A payout may be expressed on an overall or periodic basis and as either a percentage of the investment's cost or in a real dollar amount.
A payout can also refer to the period in which an investment or a project is expected to recoup its initial capital investment and become minimally profitable. It is short for "time to payout," "term to payout," or "payout period."
Key Takeaways
- Payouts refer to the anticipated financial returns or distributions from investments or annuities.
- In terms of financial securities, payouts are the amounts received at certain periods, such as monthly for annuity payments.
- A payout may also refer to the capital budgeting tool used to determine the time it takes for a project to pay for itself.
- Companies can distribute earnings to investors through the issuance of dividends and share buybacks.
- The payout ratio is the rate of income paid out to investors in the form of distributions.
Understanding Payout
In terms of financial securities, such as annuities and dividends, payouts refer to the amounts received at given points in time. For example, in the case of an annuity, payouts are made to the annuitant at regular intervals, such as monthly or quarterly.
Payout Ratio as a Measure of Distribution
There are two main ways that companies can distribute earnings to investors: dividends and share buybacks. With dividends, payouts are made by corporations to their investors and can be in the form of cash dividends or stock dividends. The payout ratio is the percentage rate of income the company pays out to investors in the form of distributions. Some payout ratios include both dividends and share buybacks, while others only include dividends.
For example, a payout ratio of 20% means the company pays out 20% of company distributions. If company A has $10 million in net income, it pays out $2 million to shareholders. Growth companies and newly formed companies tend to have low payout ratios. Investors in these companies rely more on share price appreciation for returns than dividends and share buybacks.
The payout ratio is calculated with the following formula:
- Payout ratio = total dividends / net income
The payout ratio can also include share repurchases, in which case the formula is as follows:
- Payout ratio = (total dividends + share buybacks) / net income
The cash amount paid out to dividends can be found on the cash flow statement in the section titled cash flows from financing. Dividends and stock repurchases both represent an outflow of cash and are classified as outflows on the cash flow statement.
Payout and Payout Period as a Capital Budgeting Tool
The term "payout" may also refer to the capital budgeting tool used to determine the number of years it takes for a project to pay for itself. Projects that take longer are considered less desirable than projects with a shorter period.
The payout, or payback period, is calculated by dividing the initial investment by the cash inflow per period. If company A spends $1 million on a project that saves $500,000 a year for the next five years, the payout period is calculated by dividing $1 million by $500,000. The answer is two, which means the project will pay for itself in two years.
FAQs
A payout refers to the transfer of funds, assets, or benefits to individuals, entities, or investors. Typically, payouts are made as compensation, rewards, or settlements. Examples of payouts include salaries and wages, dividends, and insurance settlements.
What are the different types of payouts? ›
Payouts can be made in various forms, such as cash, check, bank transfer, or cryptocurrency, depending on the agreement between the parties involved.
What is an example of a payout? ›
For example, a payout ratio of 20% means the company pays out 20% of company distributions. If company A has $10 million in net income, it pays out $2 million to shareholders. Growth companies and newly formed companies tend to have low payout ratios.
What is the definition of payout? ›
A payout is a sum of money, especially a large one, that is paid to someone, for example, by an insurance company or as a prize.
What is payout method? ›
Payout Method means collections of funds by the recipient by a pay out in cash, into a wallet or alternatively into a Bank account nominated by the Sender held with by the Recipient.
What is the difference between a payment and a payout? ›
While payments focus on a broad, overall practice that involves moving money, payouts have 3 nuances that are very unique to them. [1] Multi-party: a payout is almost always associated with a beneficiary who “participates” in a transaction, e.g. a merchant, a logistics partner, an online marketplace, etc.
What is the difference between a payoff and a payout? ›
"Pay-off" connotes appeasem*nt to extortion, blackmail, an out-of-court financial settlement with a plaintiff, or "hush" money. "Pay-out" connotes payment of an employer to employees, collective payroll. A business' payment for goods or services.
What is cash payout? ›
countable noun. A payout is a sum of money, especially a large one, that is paid to someone, for example by an insurance company or as a prize.
What does a 100% payout mean? ›
A payout ratio over 100% indicates that the company is paying out more in dividends than its earning can support, which some view as an unsustainable practice.
What is payout request? ›
Definition. Payout request - is an operation for abstraction from route and payout. It allows dynamic routing and failover for payouts. Payout Request Event - event log for a specific request for payout. Gives detailed information about the process for requesting payout.
Generally speaking, a dividend payout ratio of 30-50% is considered healthy, while anything over 50% could be unsustainable.
What is payout products? ›
You can have your own software for Simplify payments from your company account for salary, vendor payments, refunds, partner payments, and more. A product is a specific service, facility, scheme or utility that you make available to customers of your bank.
What is payout solutions? ›
Payout solutions are significant across various sectors and contexts. They are payments made by companies to third parties, including clients, suppliers, investors, workers, or business associates. Payouts also mean transferring business funds from a merchant's account to the business' general bank account.
What is a payout in simple practice? ›
Payments processed using our Online Payments feature will be deposited as a total amount, known as a payout. Payouts are sent to the bank account associated with your Online Payments account. Payouts can be deposited on a daily, weekly, or monthly basis.
