Dividend payout ratio
Dividend payout ratio is the fraction of net income a firm pays to its stockholders in dividends:
The part of the earnings not paid to investors is left for investment to provide for future earnings growth. Investors seeking high current income and limited capital growth prefer companies with high Dividend payout ratio. However investors seeking capital growth may prefer lower payout ratio because capital gains are taxed at a lower rate. High growth firms in early life generally have low or zero payout ratios. As they mature, they tend to return more of the earnings back to investors. Note that dividend payout ratio is calculated as DPS/EPS.
According to Financial Accounting by Walter T. Harrison, the calculation for the payout ratio is as follows:
Payout Ratio = (Dividends - Preferred Stock Dividends)/Net Income
Conversely, the P/E ratio is the Price/Dividend ratio times the DPR.
Impact of buybacks
Some companies chose stock buybacks as an alternative to dividends, in such cases this ratio becomes less meaningful. One way to adapt it using an augmented payout ratio:
Augmented Payout Ratio = (Dividends + Buybacks)/ Net Income for the same period
|Dividends as %
of Total Return
For smaller, growth companies, the average payout ratio can be as low as 10%.
- Dividend yield
- Liquidating dividend
- Special dividend
- Sustainable growth rate
- Retention ratio
- Warren Buffett's Dividend Stock Strategy
- Reasons to Consider Dividend-Paying Stocks
- A Guide to Dividend Stocks
- http://pages.stern.nyu.edu/~adamodar/ Financial Ratios and Measures
- http://www.eatonvance.com/mutual_funds/dividend_story.php The Dividend Story[dead link]
- http://www.barra.com/Research/Fundamentals.aspx S&P/Barra Indexes -- Fundamentals[dead link]