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
An extended play (EP) is a Sound recording and reproduction, musical recording that contains more tracks than a Single (music), single but fewer than an album. Contemporary EPs generally contain up to eight tracks and have a playing time of 1 ...
.
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
The
dividend yield
The dividend yield or dividend–price ratio of a share is the dividend per share divided by the price per share. It is also a company's total annual dividend payments divided by its market capitalization, assuming the number of shares is constan ...
is given by
earnings yield
Earning yield is the quotient of earnings per share (E), divided by the share price (P), giving E/P. It is the reciprocal of the P/E ratio.
The earning yield is quoted as a percentage, and therefore allows immediate comparison to prevailing long ...
times the dividend payout ratio:
:
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
Historic data
The data for S&P 500 is taken from a 2006 Eaton Vance post. The payout rate has gradually declined from 90% of
operating earnings in 1940s to about 30% in recent years.
For smaller, growth companies, the average payout ratio can be as low as 10%.
[http://www.barra.com/Research/Fundamentals.aspx S&P/Barra Indexes -- Fundamentals ]
See also
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Dividend
A dividend is a distribution of profits by a corporation to its shareholders, after which the stock exchange decreases the price of the stock by the dividend to remove volatility. The market has no control over the stock price on open on the ex ...
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Dividend yield
The dividend yield or dividend–price ratio of a share is the dividend per share divided by the price per share. It is also a company's total annual dividend payments divided by its market capitalization, assuming the number of shares is constan ...
*
Liquidating dividend A liquidating distribution (or liquidating dividend) is a type of nondividend distribution made by a corporation or a partnership to its shareholders during its partial or complete liquidation. Liquidating distributions are not paid solely out of th ...
*
Retention ratio
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Special dividend
A special dividend is a payment made by a company to its shareholders, that the company declares to be separate from the typical recurring dividend cycle, if any, for the company.
Usually when a company raises the amount of its normal dividend, t ...
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Sustainable growth rate According to Profit impact of marketing strategy, PIMS (profit impact of marketing strategy), an important lever of business success is growth. Among 37 variables, growth is mentioned as one of the most important variables for success: market share, ...
References
{{Financial ratios
Payout ratio
Financial ratios