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.
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.
Use the following formula to calculate dividend payout ratio:
Payout Ratio = Dividends per Share Earnings per Share
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
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