Dividend Payout Ratio
Dividend Payout Ratio

See Also:
Dividends
Dividend Yield
Financial Ratios

Dividend Payout Ratio Definition

What is dividend payout ratio? The dividend payout ratio measures the percentage of a company’s earnings 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 also 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

You can analyze a company’s payout ratio to determine various characteristics of the company and its operations.
For example, 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.
Whereas, 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

Use the following formula to calculate dividend payout ratio:

Payout Ratio = Dividends per Share
	       Earnings per Share

Retention Rate Calculation

Use the following formula to calculate retention rate.

Retention Ratio = Net Income – Dividends
		     Net Income

You can also use the following formula.

Retention Ratio = 1 – Payout Ratio

Learn how you can be the best wingman with our free How to be a Wingman guide!
dividend payout ratio
[box]Strategic CFO Lab Member Extra
Access your Projections Execution Plan in SCFO Lab. The step-by-step plan to get ahead of your cash flow.
Click here to access your Execution Plan. Not a Lab Member?
Click here to learn more about SCFO Labs[/box]
dividend payout ratio
 

ARTICLES YOU MIGHT LIKE

The Accounting Gap Between Large and Small Companies

The Accounting Gap: It’s unfortunate, but true. A large gap exists between the accounting departments of large or publicly traded companies and smaller or private companies. In our past 25 years of consulting we’ve noticed that more often than not, these smaller/private companies will fill the gap with Bookkeepers, rather than the degreed Accountants/CPAs they

Read More »

The Struggles of Private Company Accounting

Building your Accounting Department… When I meet a business owner operating at a successful $10+ mil in revenue I often hear them say “My CPA…” and I immediately know they are referring to a tax CPA. One thing ALL entrepreneurs have in common is that they have to file a tax return. So from day

Read More »

Financial Ratios

See also:Quick Ratio AnalysisPrice to Book Value AnalysisPrice Earnings Growth Ratio AnalysisTime Interest Earned Ratio Analysis Use of Financial Ratios Financial Ratios are used to measure financial performance against standards. Analysts compare financial ratios to industry averages (benchmarking), industry standards or rules of thumbs and against internal trends (trends analysis). The most useful comparison when

Read More »

JOIN OUR NEXT SERIES

Financial Leadership Workshop

MARCH 28TH-31ST 2022

THE ART OF THE CFO®

Financial Leadership Workshop

Days
Hours
Min

June 12-15th, 2023

SHARE THIS ARTICLE
WIKI CFO® - Browse hundreds of articles