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Dividend Payout Ratio

Dividend Payout Ratio

What Is the Dividend Payout Ratio and What Does It Tell You?

A company's dividend payout ratio is the ratio of the dividends paid to shareholders over a given period to the company's earnings for a similar period. As such, it is the percentage of a company's net income that it pays out to shareholders as dividends.
Earnings that are not paid out as dividends are ordinarily used to finance a company's continuous operations (for example pay off debt, hire staff, build new plants, repair equipment, and so forth), so a company's dividend payout ratio can be considered the ratio of income it circulates to its investors versus income it reinvests in its own operations.
The inverse, in a manner of speaking, of the dividend payout ratio is the retention ratio. This is the ratio of income that is retained for business operations to total income. On the off chance that a company has positive earnings and doesn't pay dividends, its retention ratio would be 1 (or 100%).

How Do You Calculate a Company's Dividend Payout Ratio?

There are a couple of ways of computing a company's payout ratio. For a specific period, partition the value of all dividends paid by a company's net income. On the other hand, partition a company's dividends per share by its [earnings per share](/fundamental earnings-per-share).

Dividend Payout Ratio Formula 1

DPR = Total Dividends Paid/Net Income

Dividend Payout Ratio Formula 2

DPR = Dividends per Share/Earnings per Share

Dividend Payout Ratio Example: Coca-Cola Co. (NYSE: KO)

We should investigate the Coca-Cola Company's dividend payout ratio for 2021. For this model, we'll utilize the second formula listed previously.
Coca-Cola paid a quarterly dividend of $0.42 per share during the long term. This makes for a total of $1.68 worth of dividends paid for each outstanding share throughout the year. Coca-Cola reported earnings of $2.25 per share for that year.

DPR = Dividends per Share/Earnings per Share

DPR = $1.68/$2.25

DPR = 0.7466 or 74.66%

In this way, it seems to be Coca-Cola utilized around 74.66 percent of its 2021 earnings to reward shareholders with dividend payments while holding around 25.33% of income to finance its continuous business operations. This is genuinely normal for an effective, mature, blue-chip company like Coca-Cola.

Dividend Payout Ratio versus Dividend Yield: What's the Difference?

Dividend yield is calculated by partitioning the dividends paid by a company throughout the past year by its current share price.
Thus, while dividend payout ratio compares dividends to earnings, dividend yield compares dividends to stock price, which fluctuates constantly and isn't really intelligent of a company's real value. A sudden slide in stock price, subsequently, can swell dividend yield quickly regardless of dividend payments staying unchanged. In the event that a stock's price skyrockets, then again, dividend yield can shrink rapidly.
Hence, dividend payout ratio is most likely a more informative measure. Since EPS, as opposed to stock price, fills in as the computation's denominator, changes in share price due to macroeconomic factors and market sentiment don't distort the ratio.
Whether a company's stock is soaring, plunging, or remaining to some degree stable, its dividend payout ratio provides you with a reasonable image of the percentage of its earnings it will in general disseminate to shareholders as dividends.

What Is a Good Dividend Payout Ratio?

What an investor considers a "great" DPR changes relying upon their investment objectives. A growth-situated investor keen on tech startups could see a high payout ratio as disturbing, since more up to date companies wanting to develop their market share ought to most likely be reinvesting the bulk of their earnings in growth, hiring, expansion, and so forth. A fixed-income investor, then again, would probably search out stocks with payout ratios as high as conceivable since they usually like passive income to growth.
Various industries have various standards with regards to dividends, and more established, more mature companies will generally involve a greater amount of their income for dividends than more youthful companies in growth phases.

What Does a High Dividend Payout Ratio Mean?

A high payout ratio (more than 0.5 or half, for instance) shows that a company utilizes a greater amount of its earnings to pay shareholders than it does to reinvest in business operations like hiring or research and development. This should be visible as a sign that a business is mature, stable, and fruitful to a degree that it can comfortably keep up with profitability while rewarding investors with substantial dividends consistently.
In the event that a company is posting substandard profits or is by all accounts losing market share to competition, in any case, a high payout ratio could be viewed as an indication of botch. On the off chance that profits and market share aren't secure, most investors would like to see a company double down on keeping a competitive edge than giving decreasing earnings to shareholders.
Certain types of businesses, as REITs (real estate investment trusts), are required to circulate no less than 90% of their net income to shareholders as dividends, so all REITs have a DPR of no less than 0.9 (90%).

What Does a Low Dividend Payout Ratio Mean?

A low dividend payout ratio shows that a company is holding the vast majority of its earnings to use for things like expansion, product development, and marketing. For more youthful, developing businesses, this is normal and sound. Growth investors who favor new, creative companies would prefer to see their shares go up in value over the long haul than receive quarterly or annual payouts.
In the event that, notwithstanding, a mature company known for paying dividends consistently suddenly lowers its ratio, this could be an indication of financial difficulty — profits might be sliding, and the company might be redirecting a greater amount of its earnings to things like advertising and product improvements with an end goal to recover lost market share.

Average Dividend Payout Ratios by Industry

IndustryAverage Payout Ratio
Apparel29.27%
Auto2.79%
Banks (Regional)26.08%
Construction Supplies36.62%
Farming/Agriculture18.32%
Green & Renewable Energy0.20%
Homebuilding5.83%
Metals & Mining35.95%
Restaurant/Dining47.43%
Semiconductor28.94%
Utilities (General)80.77%
The data in this table comes from NYU's Stern school of business as of January, 2022.

Highlights

  • In the event that a company pays out a portion of its earnings as dividends, the excess portion is retained by the business — to measure the level of earnings retained, the retention ratio is calculated.
  • The dividend payout ratio is the proportion of earnings paid out as dividends to shareholders, regularly communicated as a percentage.
  • Several considerations go into deciphering the dividend payout ratio, generally importantly the company's level of maturity.
  • A companies pay out the entirety of their earnings to shareholders, while some main pay out a portion of their earnings.

FAQ

Is a High Dividend Payout Ratio Good?

A high dividend payout ratio isn't generally valued by active investors. An uncommonly high dividend payout ratio can demonstrate that a company is attempting to veil a terrible business situation from investors by offering luxurious dividends, or that it just doesn't plan to forcefully utilize working capital to grow.

How Do You Calculate the Dividend Payout Ratio?

It is commonly calculated on a per-share basis by separating annual dividends per common share by earnings per share (EPS).

What Is the Difference Between the Dividend Payout Ratio and Dividend Yield?

While comparing the two measures of dividends, it's important to realize that the dividend yield lets you know the simple rate of return as cash dividends to shareholders, yet the dividend payout ratio addresses the amount of a company's net earnings are paid out as dividends.

Why Is the Dividend Payout Ratio Important?

The dividend payout ratio is a key financial measurement used to decide the sustainability of a company's dividend payment program. It is the amount of dividends paid to shareholders relative to the total net income of a company.