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!

[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]

ARTICLES YOU MIGHT LIKE

Does your Accounting Department Produce Net Income?

August 28, 2023

Coaching the Entrepreneur: Learn how to know what you don’t know. How much should I spend on accounting for my company? I have been in the accounting profession for 32 years, and for the last 6 years, I’ve owned my own consulting firm to assist companies with accounting challenges. There is one common theme that I

Paying Too Much For Accounting? How Near-Sourcing Could Help Your Small Business

July 26, 2023

Is your company maintaining accurate, U.S. GAAP-compliant financial records? Are you relying on a Tax CPA vs managerial accountants? Do you struggle to afford the professional, qualified accountants your company needs? These are some of the most common challenges we see working with companies of all sizes across industries. Art Goetz sits down with the

Is Mexico the New China?

June 1, 2023

In the wake of the COVID-19 pandemic and escalating tensions with China, American companies are actively seeking alternatives to mitigate their supply chain risks and reduce dependence on Chinese manufacturing. Nearshoring, the process of relocating operations closer to home, has emerged as an explosive opportunity for American and Mexican companies to collaborate like never before.

MARCH 28TH-31ST 2022

Days

Hours

Min

August 7-10th, 2023

Days

Hours

Min

SHARE THIS ARTICLE