What Is a Payout? Definition, How It Works, Types, and Examples

What Is a Payout?

Payouts refer to the expected returns or disbursements from investments or annuities. A payout may be expressed as a lump sum or on a 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 project is expected to recoup its initial capital investment and become minimally profitable. In this case, it is short for "time to payout," "term to payout," or "payout period."

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.

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 about cash flows from financing. Dividends and stock repurchases represent an outflow of cash and are classified as outflows on the cash flow statement.

Capital Budgeting Payouts

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.

Annuity Payouts

An annuity has two phases: an accumulation phase and a payout phase. During the accumulation phase, the annuitant deposits funds into the account so they can grow taxed-deferred until they are withdrawn. During the payout phase, which is often during retirement, the annuitant receives payments from the insurance company as income for the retiree. These payments are payouts.

An annuity payout can come in one of two forms: as a lump-sum payment, or as a payment that arrives at regular intervals, such as monthly, quarterly, or annually. With a life annuity, the payout phase will last until the annuitant dies, providing income with periodic payments for the rest of the annuitant's life. With a joint and survivor annuity, the payouts continue for the duration of the beneficiary's life, typically the surviving spouse.

This is not limited to annuities, however. If you have a pension, you may also have the option to choose between a single-life payout and a joint-and-survivor, or joint-life payout. Typically joint-life payouts are smaller than single-life payouts, to account for the number of payments that will last the duration of the life of the beneficiary.

The Bottom Line

A payout is typically what you receive as an investor as a return on your investment.

It may come in the form of dividends or share buybacks or as a periodic distribution during retirement, such as from a pension or an annuity. With retirement income, you'll have to choose whether you want a single-life payout or a joint-life payout. With the former, the payouts stop when the recipient dies. With the latter, the payments stop when the beneficiary dies.

A payout may also refer to a budgeting tool that is used to determine how long it will take for a project to pay for itself.

A payout ratio describes how much income you receive as an investor as a distribution. It's something you might want to monitor, to assess not just how well your investments are doing, but what it will really mean for your bottom line.