DEFINITION

The dividend payout ratio is the amount of dividends paid to stockholders relative to the amount of total net income of a company.

ALSO, DIVIDEND PAYOUT RATIO= Dividend per share/earning per share

The amount that is not paid out in dividends to

stockholders is held by the company for growth called

retained earnings.

This formula is used by some when considering

whether to invest in a profitable company that pays out

dividends versus a profitable company that has high

growth potential. In other words, this formula takes into

consideration steady income versus reinvestment for

possible future earnings, assuming the company has a

net income.

HOW TO CALCULATE DIVIDEND PAYOUT RATIO?

Determine the net income of the company

i.e Income after all expenses and corporate

tax.

Determine the dividend payment level. This is

normally predetermined by the company's board

of directors and approved by members at the

annual general meeting e.g use 0.4 for every

share.

Divide the Dividends amount by

the net Income i.e Dividends/Net

income

Remember strictly speaking dividend payout

ratio measures the dividend payout to common

shareholders as such the dividend attributable to

preferential shares will be subtracted from the

total dividends.

Thus the new formula will be: Dividend payout

ratio=(Dividends-Preferred stock dividends)/Net

earnings.

The ratio can also be calculated on a per unit basis thus:

Pay out Ratio=DPS(Dividend per share)/EPS(Earnings

per share)

ALSO……

For example, a very low payout ratio indicates that a company is

primarily focused on retaining its earnings rather than paying out

dividends.

The payout ratio also indicates how well earnings support the

dividend payments: the lower the ratio, the more secure the

dividend because smaller dividends are easier to pay out than

larger dividends.

Why Dividend Payout Ratio is IMPORTANT?

Some investors prefer long-term slow growth and want a company

to reinvest earnings back into the business to provide continued

growth. Other investors are looking for a cash payoff each quarter

since dividends have a tax advantaged status for now. These

calculations also determine if an investment is safe or higher risk.

The dividend payout ratio is also an indicator of how willing a

company is to pay its shareholders.

A dividend payout ratio example can help a potential investor

find the best companies to invest in. However, dividend payout

ratios can be impacted by numerous factors. Different accounting

methods may result in different earnings per share figures.

Additionally, business in different stages of growth will have

different payout ratios.

FOR EXAMPLE

NET PROFIT AFTER TAX is Rs. 21000

PROPOSED DIVIDEND ON EQUITY SHARES Rs.14000

No. of equity shares = 2100

Ans.. EPS = 21000/2100 = Rs.10

proposed dividend per share = 14000/2100 = Rs.6.67

PAYOUT RATIO= proposed dividend per share /eps *100

= 6.67/10*100 = 66.7%

HERE FOR EVERY RUPEE OF DISTRIBUTABLE PROFIT,67 paise WILL BE DISTRIBUTED AS DIVIDEND, while 33 paise will be reinvested.