Dividend payout ratio
The dividend payout ratio is the fraction of net income a firm pays to its stockholders in dividends:
The part of 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 a high dividend payout ratio. However, investors seeking capital growth may prefer a 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. The 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 choose 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
- Retention ratio
- Special dividend
- Sustainable growth rate
- http://pages.stern.nyu.edu/~adamodar/ Financial Ratios and Measures
- http://www.eatonvance.com/mutual_funds/dividend_story.php The Dividend Story Archived January 27, 2007, at the Wayback Machine
- http://www.barra.com/Research/Fundamentals.aspx S&P/Barra Indexes -- Fundamentals Archived December 13, 2007, at the Wayback Machine