Financial RatiosDividend Payout Ratio Definition
What is dividend payout ratio? The dividend payout ratio measures the percentage of a company’s earnings that are paid to shareholders as dividends. When a company earns profit, it has the option of reinvesting that profit into the business to grow and expand the company or paying some of that profit out to shareholders as dividends.
We can define payout ratio as the percent of earnings that a company pays out in dividends to shareholders. The opposite of the dividend payout ratio is the retention ratio. Retention ratio is the percentage of profit that is reinvested in the company instead of being paid out to shareholders in dividends. Payout Ratio Interpretation
A company’s payout ratio is can be analyzed to determine various characteristics of the company and its operations.
Small fast-growing companies are likely to invest much of their earnings in the business for expansion and growth. These companies are likely to have a low payout ratio or none at all. A low payout ratio can also demonstrate that a company’s dividend is small compared to its earnings, indicating that the dividend is likely to be secure and reliable.
Large slow-growth companies, or companies like utility companies, are likely to pay out larger dividends to shareholders. These companies will have a higher payout ratio.
Dividend Payout Ratio Calculation
Payout Ratio = Dividends per Share
Earnings per Share
Retention Rate Calculation
Retention Ratio = Net Income – Dividends
Retention Ratio = 1 – Payout Ratio