What is Dividend Payout Ratio
Dividend payout ratio is a financial ratio that measures the amount of the company’s dividends paid out to the shareholders compared with the company’s net income, expressed as a percentage. To put it simply, the dividend payout ratio (DPR) is a percentage of net income that the company paid out to the shareholders as dividends.
The percentage of dividend payout ratio indicates how much the company’s dividends paid out for each dollar of net income, while the remaining portion of the net income is retained by the company.
Therefore, the higher the dividend payout ratio, the higher amount of dividend per share that the investor earns, but the less retained cash flow to the company. In contrast, the lower dividend payout ratio means the company paid out fewer dividends to the shareholders but retained more cash flow to expand the business.
To be clear, there is no good or bad dividend payout ratio. The ratio only measures how much the company paid out dividends to the investors compared with the net income, and how much the company retained the cash flow to reinvest to expand the business.
Normally, the investors view the dividend payout ratio to determine the company’s growth possibility due to its reinvest history, and to find a company that payout a good level of dividend.
Dividend Payout Ratio Formula
The dividend payout ratio is the comparison between the dividend paid out to shareholders and the company’s net income. Then, the dividend payout ratio can be calculated by dividing the amount of the dividend paid out by the net come, as the following dividend payout ratio formula:
DPR = Dividend Payout / Net Income
or
DPR = Dividends per share / Earnings per share
or
DPR = 1 – Retention Ratio
Where the retention ratio can be calculated by the following formula: Retention ratio = (Earnings per share – Dividends per share) / Earnings per share
For example, the company has a net income of $200,000 and a dividend paid out of $50,000 last year. The dividend payout ratio will be: 50,000 / 200,000 = 0.25 or 25%. This means the company paid out the dividends for 25 percent or 25 cents for each dollar of net income to the investors.
FrequeFrequently Asked Questions
The dividend payout ratio measures how much the company paid out dividends to the investors compared with the net income, and how much the company retained the cash flow to reinvest to expand the business.
The dividend payout ratio can be calculated by dividing the amount of the dividend paid out by the net come, as the following formula: DPR = Dividend Payout / Net Income
There is no good or bad dividend payout ratio, it depends on the company’s dividend policy. The DPR only measures how much the company paid out dividends to the investors compared with the net income, and how much the company retained the cash flow to reinvest to expand the business.
