Dividend Payout Ratio

Dividend payout ratio is the ratio of dividend per share divided by earnings per share. It is a measure of how much earnings a company is paying out to its shareholders as compared to how much it is retaining for reinvestment.

Formula

Dividend Payout Ratio = Dividend per Share
Earnings per Share

Dividend payout ratio can also be calculated as total dividends divided by net income.

Analysis

A shareholder has two sources of return, namely periodic income in the form of dividends and capital appreciation. Dividend payout ratio tells what percentage of total earnings the company is paying back to shareholders. A healthy dividend payout ratio leads to investor confidence in the company.

Plowback ratio (also called retention rate) is equals 1 − payout ratio and it equals the earnings retained divided by total earnings for the period.

Example

Zeta Ltd. earned an EPS of $2 in FY 2011 when it paid $1 per share as dividends. Find its dividend payout ratio.

Solution

Dividend Payout Ratio = DPS/EPS = $1/$2 = 50%

Written by Obaidullah Jan, ACA, CFA