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Dividend Payout Ratio

Dividend Pay-Out Ratio Assignment / Homework Help
This is the ratio of dividend per share (DPS) to Earnings per share (EPS). It indicates what percentage of total earnings is paid to shareholders. It is computed as:

Dividend per share
Earnings per share

OR

Dividends
Net Income

The percentage of the earnings that is not paid out (1 - Dividend pay-out) is retained for the firms future needs. There is no guideline as to what percentage of earnings should be declared as dividend and it varies according to firm's fund requirements to support its operations. If the firm is in need of funds, then it may cut the dividends in relation to earnings and on the other hand if the firm finds that it lacks opportunities to use the profits generated, it might increase the dividends. Firms that experience high growth rates tend to have a low pay-out ratio as compared to the ones that have low growth expectations. High pay-out ratio means that the firm will have less profit to plough back into the business for future growth. But in both the cases, consistency of dividend payment is important to the shareholders.

Example:
If a company has earnings per share of $3 and pays out $2 in dividends, its dividend pay-out ratio would be 67%

$2
$3

67%

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