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The more earnings are paid out to shareholders as dividends, the less earnings are retained by the company as capital.

earnings = dividends + capital retained

Since retained capital finances growth, the more earnings are used to pay dividends, the less earnings are used to create growth. Two ratios that measure a company's choice in handling its earnings are the dividend payout rate and the retention rate. The dividend payout rate compares dividends to earnings. The retention rate compares the amount of capital retained to earnings.

The dividend payout rate figures the dividend as a percentage of earnings.

dividend payout rate = dividends ÷ earnings

The retention rate figures the retained capital as a percentage of earnings.

retention rate = capital retained ÷ earnings

Because earnings = dividends + capital retained, then

100% of earnings = dividend payout + retention rate.

If a company's dividend payout rate is 40 percent, then its retention rate is 60 percent; if it pays out 40 percent of its earnings in dividends, then it retains 60 percent of them.

Since Microsoft has earnings of $15.3 billion and dividends of $4.68 billion, it must retain $10.62 billion of its earnings. So, for Microsoft,

dividend payout rate = 4.68 billion/15.3 billion = 30.59%
retention rate = 10.62 billion/15.3 billion = 69.41%.

There is no benchmark dividend payout or retention ratio for every company; they vary depending on the age and size of the company, industry, and economic climate. These numbers are useful, however, to get a sense of the company's strategy and to compare it to competitors.

A company's value is in its ability to grow and to increase earnings. The rate at which it can retain capital, earn it and not pay it out as dividends, is a factor in determining how fast it can grow. This rate is measured by the internal growth rate and the sustainable growth rate. The internal growth rate answers the question, "How fast could the company grow (increase earnings) without any new capital, without borrowing or issuing more stock?" Given how good the company is at taking capital and turning it into assets and using those assets to create earnings, the internal growth rate looks at how fast the company can grow without any new borrowing or new shares issued.

The sustainable growth rate answers the question, "How fast could the company grow without changing the balance between using debt and using equity for capital?" Given how good the company is at taking capital and turning it into assets and using those assets to create earnings, the sustainable growth rate looks at how fast the company can grow if it uses some new borrowing, but keeps the balance between debt and equity capital stable.

Both growth rates use the retention rate as a factor in allowing growth. The fastest rate of growth could be achieved by having a 100 percent retention rate, that is, by paying no dividends and retaining all earnings as capital.

An investor who is not using stocks as a source of income but for their potential gain may look for higher growth rates (evidenced by a higher retention rate and a lower dividend payout rate). An investor looking for income from stocks would instead be attracted to companies offering a higher dividend payout rate and a lower retention rate (despite lower growth rates).