Dividend Payout Ratio

The dividend payout ratio, or simply the payout ratio is a market prospect ratio which shows the percentage of a corporation’s earnings that is paid out in the form of cash dividends.

The dividend payout ratio is calculated by dividing the cash dividends per share of common stock by the earnings per share of common stock.

A fast growing organization usually has a low dividend payout ratio in order to retain and reinvest its earnings in additional income producing assets.

Investors are particularly interested in the dividend payout ratio because they want to know if companies are paying out a good portion of net income to investors. For example, most start up companies and tech companies rarely give dividends at all. In fact, Apple, which was formed in the 1970s, just gave its first dividend to shareholders in 2012.

Formula to calculate Dividend Payout Ratio

The formula to calculate Dividend Payout Ratio is:

Dividend Payout Ratio = Total Dividends / Net Income

Analysis

Any investor would want to see a steady flow of sustainable dividends from a company. A consistent trend in this ratio is considered more favourable than a high or a low ratio.

Even if a company declares dividends and increase their ratio for a year, a single high ratio does not mean that much. Investors are mainly concerned with sustainable trends. For example, investors can assume that if a company has consistent a payout ratio of 20 percent for the last ten years, it will continue giving 20 percent of its profit to the shareholders.

Example

Curlie’s Kitchen is a restaurant chain that has several shareholders. Curlie’s reported $10,000 of net income on his income statement for the year. Curlie’s issued $3,000 of dividends to its shareholders during the year. Here is how Curlie’s dividend payout ratio will be calcualted.

Dividend Payout Ratio =  $3,000 / $ 10,000

Dividend Payout Ratio = 30%

The above figure shows, Curlie’s is paying out 30 percent of their net income to its shareholders. Depending on Curlie’s debt levels and operating expenses, this could considered as a sustainable rate since the earnings appear to support a 30 percent ratio.