# Understanding Payouts: Definition, Types, and How They Work

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> **Definition**
>
> A payout refers to the expected returns or distributions from investments or annuities, received as a lump sum or periodically, and may also indicate the time it takes for a project to recoup its initial investment.

## What Is a Payout?

Payouts refer to the [returns](https://www.investopedia.com/terms/r/return.asp) or disbursements from investments or [annuities](https://www.investopedia.com/investing/overview-of-annuities/), provided as lump sums or periodic payments in either dollar amounts or percentages. They're also used in capital budgeting to indicate the payout period, the time it takes for an investment to recover its initial cost. Understanding payouts and payout ratios is crucial for assessing distributions to investors and guiding financial decisions.

### Key Takeaways

*   Payouts are financial returns or distributions from investments or annuities.
*   The payout ratio measures the percentage of income a company distributes to investors.
*   An annuity payout can be a lump sum or regular payments, like monthly or quarterly.
*   The payout period in capital budgeting defines how long it takes for a project to pay for itself. 
*   Payouts from annuities typically continue until the annuitant's or the beneficiary's life ends.

## Understanding the Payout Ratio in Investment Returns

There are two main ways that companies can distribute earnings to investors: [dividends](https://www.investopedia.com/terms/d/dividend.asp) and [share buybacks](https://www.investopedia.com/articles/02/041702.asp). Companies give payouts to investors through [cash](https://www.investopedia.com/terms/c/cashdividend.asp) or [stock dividends](https://www.investopedia.com/terms/s/stockdividend.asp). The [payout ratio](https://www.investopedia.com/terms/p/payoutratio.asp) is the percentage rate of income the company pays out to investors in the form of [distributions](https://www.investopedia.com/terms/d/distribution.asp). Some payout ratios include both dividends and share buybacks, while others only include dividends.

> **Fast Fact**
>
> 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](https://www.investopedia.com/terms/g/growthcompany.asp) and newly formed companies tend to have low payout ratios. Investors in these companies rely more on share price [appreciation](https://www.investopedia.com/terms/a/appreciation.asp) 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

You can find the cash amount paid out as dividends on the [cash flow statement](https://www.investopedia.com/terms/c/cashflowstatement.asp) under financing activities. Dividends and stock repurchases represent an outflow of cash and are classified as outflows on the cash flow statement.

## Evaluating Payouts in Capital Budgeting Decisions

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.

## Exploring Annuity Payout Options

An annuity has two phases: [accumulation](https://www.investopedia.com/terms/a/accumulationperiod.asp) and payout. During accumulation, the annuitant deposits money, which grows tax-deferred. In the payout phase, often in retirement, the annuitant receives payments from the insurance company as income.

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](https://www.investopedia.com/terms/l/lifeannuity.asp), 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](https://www.investopedia.com/terms/j/jointandsurvivorannuity.asp), the payouts continue for the duration of the [beneficiary](https://www.investopedia.com/terms/b/beneficiary.asp)'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](https://www.investopedia.com/terms/s/single-life-payout.asp) and a joint-and-survivor, or [joint-life payout](https://www.investopedia.com/terms/j/joint-life-payout.asp). 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.

## What Is an Example of an Annuity Payout?

  
Take a life annuity with an account balance of $2 million. A 6% payout rate would distribute $120,000 to the annuitant every year until their death. Divided into monthly payments, this would equal $10,000 per month.

## What Is the Meaning of Payout Payment?

Payout, as a noun, is a sum of money that someone receives, either in a lump sum or on a regular basis. It's a payment.

Paying out, as a verb, is the process of making a payment to a recipient.

## Is It Payout or Pay Out?

According to Merriam-Webster, "payout" is a noun that means "the act of paying out," or "payoff."

## The Bottom Line

A payout is typically what you receive as an investor as a [return on your investment](https://www.investopedia.com/terms/r/returnoninvestment.asp).

It may come in the form of dividends, share buybacks, a lump sum, or 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.  

> **Article Sources**
>
> 1.  Merriam-Webster. "[Payout](https://www.merriam-webster.com/dictionary/payout)."