12. Give the meaning of dividend payout ratio.
The dividend payout ratio is the percentage of a company's net earnings paid out to shareholders as cash dividends. The remaining profit is kept by the company to pay off debt or reinvest in the business. [1, 2]
Why it mattersInvestors look at this ratio to understand a company's goals. A high ratio means the company focuses on paying shareholders. A low ratio means the company uses most of its profits to grow. [3, 4, 5]
How to calculate itThe ratio can be figured out for the whole company or on a per-share basis.
- Per Share Formula:$\text{Dividend Payout Ratio} = \frac{\text{Dividends Per Share (DPS)}}{\text{Earnings Per Share (EPS)}} \times 100$
- Total Profit Formula:$\text{Dividend Payout Ratio} = \frac{\text{Total Dividends Paid}}{\text{Net Income}} \times 100$ [1, 7]
For example: If a company earns $10 per share and pays a $3 dividend per share, its payout ratio is 30%. This means the company gives $3 to shareholders and keeps $7 to grow. [1, 8]
You can read more about this financial metric on Investopedia's Payout Ratio Guide. [9]
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