What Is a Dividend Payout Ratio? Meaning, Calculation & Importance

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The dividend payment ratio reveals dividends paid as a portion of overall incomes for a provided duration.

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

A business’s dividend payment ratio is the ratio of the dividends paid to investors over a provided duration to the business’s profits for the very same duration. Simply put, it is the portion of a business’s earnings that it pays to investors as dividends.

Dividend Payout Ratio - Formula, Guide, What You Need to Know

Earnings that are not paid as dividends are normally utilized to fund a business’s continuous operations (e.g. settle financial obligations, work with personnel, construct brand-new plants, repair work devices, and so on), so a business’s dividend payment ratio can be considered the ratio of earnings it disperses to its financiers vs. earnings it reinvests in its operations.

The opposite, so to speak, of the dividend payment ratio, is the retention ratio. This is the ratio of earnings that is kept for company operations to overall earnings. If a business has favorable profits and does not pay dividends, its retention ratio would be 1 (or 100%).

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

There are several methods to determine a business’s payment ratio. For a particular duration, divide the worth of all dividends paid by a business’s earnings. Divide a business’s dividends per share by its revenues 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)

Let’s have a look at the Coca-Cola Company’s dividend payment ratio for2021 For this example, we’ll utilize the 2nd formula noted above.

Coca-Cola paid a quarterly dividend of $0.42 per share throughout the 2021 year. This produces an overall $1.68 worth of dividends spent for each impressive share throughout the year. Coca-Cola reported revenues 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%

So, it appears like Coca-Cola utilized about 74.66 percent of its 2021 incomes to reward investors with dividend payments while maintaining about 25.33% of earnings to fund its continuous company operations. This is relatively regular for an effective, fully grown, blue-chip business like Coca-Cola.

Dividend Payout Ratio vs. Dividend Yield: What’s the Difference?

The dividend yield is computed by dividing the dividends paid by a business over 2015 by its present share cost.

So, while the dividend payment ratio compares dividends to profits, dividend yield compares dividends to stock rate, which differs continuously and is not always reflective of a business’s genuine worth. An unexpected slide in stock cost, for that reason, can pump up dividend yield quickly regardless of dividend payments staying the same. If a stock’s cost skyrockets, on the other hand, dividend yield can diminish rapidly.

TheStreet Dictionary Terms

For this factor, the dividend payment ratio is most likely a more useful step. Given that EPS, instead of stock cost, acts as the computation’s denominator, modifications in share rate due to macroeconomic elements and market belief do not misshape the ratio.

Whether a business’s stock is increasing, dropping, or staying rather steady, its dividend payment ratio provides you a clear image of the portion of its revenues it tends to disperse to investors as dividends.

What Is a Good Dividend Payout Ratio?

What a financier thinks about a “great” DPR differs depending upon their financial investment objectives. A growth-oriented financier thinking about tech start-ups may see a high payment ratio as unpleasant, considering that more recent businesses wanting to grow their market share ought to most likely be reinvesting the bulk of their incomes in development, working with, growth, and so on. A fixed-income financier, on the other hand, would likely look for stocks with payment ratios as high as possible because they choose passive earnings for development.

Different markets have various standards when it concerns dividends, and older, more fully grown businesses tend to utilize more of their earnings for dividends than more youthful businesses in the development stages.

What Does a High Dividend Payout Ratio Mean?

A high payment ratio (over 0.5 or 50%, for instance) shows that a business utilizes more of its profits to pay investors than it does to reinvest in organization operations like working with or research study and advancement. This can be viewed as an indication that a company is fully grown, steady, and effective to a degree that it can conveniently preserve success while fulfilling financiers with significant dividends regularly.

If a business is publishing low-quality revenues or appears to be losing market share to competitors, nevertheless, a high payment ratio might be viewed as an indication of mismanagement. If revenues and market share aren’t protected, many financiers would choose to see a business double down on preserving a one-upmanship than passing diminishing revenues on to investors.

Certain kinds of companies, like REITs (property financial investment trusts), are needed to disperse a minimum of 90% of their earnings to investors as dividends, so all REITs have a DPR of a minimum of 0.9 (90%).

What Does a Low Dividend Payout Ratio Mean?

A low dividend payment ratio shows that a business is keeping the majority of its revenues to utilize for things like growth, item advancement, and marketing. For more youthful, growing organizations, this is regular and healthy. Development financiers who prefer brand-new, ingenious businesses would rather see their shares increase in worth in time than get quarterly or yearly payments.

If nevertheless, a fully grown business understood for paying dividends regularly unexpectedly decreases its ratio, this might be an indication of the monetary problem– earnings might be moving, and the business might be diverting more of its incomes to things like marketing and item enhancements to restore lost market share.

Average Dividend Payout Ratios by Industry

The information in this table originates from NYU’s Stern school of service since January 2022

Industry&& nbsp;-LRB- Average Payout Ratio
Apparel 2927%
Auto 2.79%
Banks (Regional) 2608%
Construction Supplies 3662%
Farming/Agriculture 1832%
Green & & Renewable Energy 0.20%
Homebuilding 5.83%
Metals & & Mining 3595%
Restaurant/Dining 4743%
Semiconductor 2894%
Utilities (General) 8077%

Frequently Asked Questions (FAQ)

Below are responses to a few of the most typical concerns financiers have about dividend payment ratios that were not currently covered in the areas above.

Can a Dividend Payout Ratio Be Negative?

Yes, if a business has unfavorable revenues but still pays dividends, its dividend payment ratio is unfavorable. If a business had an EPS of -$ 1.23 and paid $0.38 in dividends that year, it would have a DPR of -0.03 or -3%.

Can a Dividend Payout Ratio Be More than 1 (or 100%)?

Yes, periodically, businesses’ incomes drop however they hesitate to lower dividends. In these cases, some businesses wind up paying more in dividends than they make for a provided duration, and when this happens, DPR can be over 100%. If a business paid $2.00 in dividends however published an EPS of just $1.95, its payment ratio would be 1.02 or 102%.

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