Lisa Borga

Date Published: January 3, 2022

What is the Dividend Payout Ratio?

The dividend payout ratio (DPR), also known as the payout ratio, measures the amount of dividends that are paid to a company’s shareholders relative to its net income.

A simple way to look at this is simply as the percentage of net income that a company distributes to its shareholders through dividends.

Calculating the Dividend Payout Ratio

The dividend payout ratio can be computed either as a whole or per share.

Additionally, if one knows the retention ratio, which is the inverse of DPR, it is easy to calculate the latter ratio.

Let’s look at all of these formulas.

To calculate DPR as a whole, the formula is:

DPR = Total Dividends / Net Income

To calculate DPR per share, the formula is:

DPR = Dividends Per Share / Earnings Per Share

To use the retention ratio to calculate DPR, the formula is:

DPR = 1 – Retention Ratio

Using these formulas, an individual can find out the amount of money a company is returning to its shareholders vs. how much it is retaining to cover expenses, pay down debt, keep in reserve, or invest in growth.

What Does the Dividend Payout Ratio Tell You?

A number of factors should be considered when interpreting the meaning of a company’s DPR, particularly the company’s maturity.

A new company that is still focused on growth and looking for ways to expand, move into markets, and develop new products often will distribute low if any dividends.

However, this is forgivable because it is often with the intent of providing shareholders with greater value down the line.

For more mature and established companies, it is expected that they will return more substantial DPR.

For many companies, beginning to offer dividends is also a big step because it serves to indicate that they have moved past their growth stage.

It indicates that share prices will generally not appreciate rapidly.

For companies that do not offer dividends at all, the ratio will be 0%, and for companies that pay all of their net income as dividends, it will be 100%.

Sustainable Dividends

DPR is extremely useful for judging the sustainability of a company’s dividends.

Many companies are reluctant to reduce their offering of dividends because it reflects badly on the company’s performance as well as management’s.

This may also drive stock prices down.

However, offering a DPR that is greater than 100% would mean that a company is offering more money to stockholders than it is actually earning, which is unsustainable in the long run.

In the short term, however, this may be a viable strategy.

For many companies that suffer one poor year, it may actually be in the company’s best interest not to cut dividends so long as management expects better earnings looking forward.

So, before cutting payouts, it can be a good idea to look at expected future earnings and compute a forward-looking payout ratio to consider while analyzing a backward-looking one.

It’s also a good idea to look at the long-term trend when considering payout ratios.

If the payout ratio is consistently rising, this could mean the business is healthy and mature.

Whereas, a suddenly increasing payout ratio may mean that the dividend will become unsustainable.

The retention ratio is quite different than the DPR.

The dividend payout ratio tells investors the amount a company pays out in dividends to its stockholders as compared to its net income.

In contrast, the retention ratio tells investors the amount of profits that a company retains or re-invests.

Dividends Vary By Industry

Different industries can have payout ratios that vary significantly.

Therefore, it is best to compare this ratio with those of other businesses in the same industry as it is with most ratios.

An example of this would be utility companies.

These companies are supplying something people need and are therefore going to purchase even in rough economic times, so they have a consistent stream of revenue coming in.

Many of these companies are regulated as well, which helps ensure the company earns an adequate return on its invested capital.

Also, it’s important to remember that there are other ways for a company to provide value to stockholders, which means that the payout ratio doesn’t tell stockholders everything they need to know about a stock.

Another ratio called the augmented payout ratio includes share buybacks in its metric.

To compute the augmented payout, the sum of the dividends and buybacks is divided by net income for the period being considered.

A high augmented payout ratio could mean that a company is trying to boost share prices in the short term without adequately considering long-term growth or reinvestment.

Calculating the Payout Ratio in Microsoft Excel

You will be able to compute the dividends per share if you have the dividends over a particular period of time along with the outstanding shares.

If you were thinking of investing in a company that paid \$15 million in dividends and had 10 million shares outstanding, you could use Microsoft Excel to calculate the payout ratio.

Just start Microsoft Excel and enter “Dividends per Share” in cell A1. Then, enter “=15000000/10000000” into cell B1.

This calculation will give a dividend per share of \$1.50.

After doing this, you’ll want to compute the earnings per share if you don’t already have it.

Enter “Earnings per Share” into cell A2. Consider what the earnings per share would be if the company had a net income of \$100 million for last year.

To find the earnings per share, the formula would be (net income – dividends on preferred stock) ÷ (shares outstanding).

You would enter “=(100000000 – 10000000)/10000000” in cell B2. The earnings per share for the business would be \$8.50.

The last step will be calculating the payout ratio.

To do this, enter “Payout Ratio” in cell A3. Then, enter”=B1/B2” into cell B3; the payout ratio will be 15.00%.

This ratio is used by investors to determine if dividends are suitable and sustainable.

The payout ratio tends to vary by sector, with, for example, mature companies in sectors with little growth generally having a high payout ratio due to a reasonably reliable cash flow.

Using a Payout Ratio

Businesses have a number of options for what they can do with the profits they earn in any fiscal period.

They can choose to pay dividends to their stockholder, or they could keep the profits and reinvest them in the company.

They may even decide to split the profits between these two options.

The part of a business’s profits that it decides to pay in dividends to its stockholders is sometimes measured by calculating the payout ratio.

This allows investors to see the amount of net earnings the company is paying out as dividends.

An example of this would be Albertsons.

They paid out dividends of \$.32 per share over the last year, and their TTM EPS as of December 23, 2021, is \$1.18.

This gives Albertsons a payout ratio of 27%.

This is calculated by dividing \$.32 by \$1.18.

Dividend Payout vs. Dividend Yield

If an investor is considering these two ratios, it is a good idea to remember that dividend yield expresses the percentage that a business pays out annually in dividends per dollar invested.

In comparison, the dividend payout ratio tells an investor the amount of the net earnings of a company it pays out as dividends.

More people are familiar with dividend yield.

However, a lot of people believe that the dividend payout ratio is better for analyzing the ability of a company to pay out dividends consistently in the future.

This is because the dividend payout ratio is more related to the cash flow of a company.

The dividend yield tells investors the amount of dividends a company pays out over a period of a year with respect to the market price of the stock’s shares.

This ratio is expressed as a percentage.

This allows stockholders to see the return per dollar invested as received in dividends.

The dividend yield is computed by:

Dividend Yield = Price Per Share / Annual Dividends Per Share

An example of this would be a company that paid its stockholders annual dividends per share of \$20 million on a stock with a market price of \$100 per share that has a 10% dividend yield.

Stocks that increase in share price have a reduction in their dividend yield percentage.

This works in reverse, so if a stock has a decrease in share price, its dividend yield percentage will increase.

​What Does the Payout Ratio Tell Investors?

The payout ratio is considered an important financial ratio.

It is used to analyze how sustainable the dividend payment program of a company is.

This ratio is a comparison of the dividends a company pays to its stockholders to the company’s total net income.

How to Compute the Dividend Payout Ratio?

One way the dividend payout ratio is computed is by taking the annual dividends per share of common stock and dividing this by the earnings per share.

Is a High Dividend Payout Ratio Always Good?

Investors do not always want a high dividend payout.

This is true because the reasons for paying out high dividends are not always good.

It’s possible the company may be hiding from investors the fact that their business is in a difficult situation by paying out high dividends.

The business could also not be using its working capital in an attempt to expand as some investors might prefer.

Are the Dividend Payout Ratio and Dividend Yield Different?

The dividend yield gives investors the simple rate of return, which is paid to shareholders as cash dividends.

Whereas the dividend payout ratio shows what portion of a company’s net earnings the company pays out in the form of dividends

Key Highlights

• The dividend payout ratio shows the portion of earnings that a company pays out to its shareholders in dividends, generally represented as a percentage.
• In some companies, all earnings will be distributed to stockholders, while in others, a portion or even none may be distributed.
• For companies that payout only a portion of their earnings, the remaining portion will be used to cover costs and grow the business, and to measure the portion of earnings that are retained; the retention ratio is used.
• A number of factors should be considered in interpreting DPR, including most notably the company’s maturity.
• There is no optimal DPR, and the normal ratio will depend a great deal on a company’s industry, business plan, and maturity of the business.

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1. University of West Georgia "Determinants of Dividend Payout Policy" Page 1 . January 3, 2022

2. Penn State University "Revisiting the Determinants of Dividend Payout Ratios in Ghana" Page 1 . January 3, 2022

3. Louisiana State University "Earnings, Cash Flow, Dividend Payout and Growth Influences on the Price of Common Stocks." Page 1 . January 3, 2022