What is the Dividend Payout Ratio?
The Dividend Payout Ratio is the proportion of a company’s net income that is paid out as dividends as a form of compensation for common and preferred shareholders.
Typically expressed as a percentage, the dividend payout ratio depicts how much of a company’s earnings are paid out to shareholders as opposed to being retained and re-invested into operations – which has significant implications on the type of investors that are attracted to the stock.
Dividend payout ratio formula
A company's dividend payout ratio is the percentage of that company's earnings that it pays out to its investors as dividend income. The dividend payout ratio formula is:
Total Annual Dividend Payments ÷ Annual Earnings = Dividend Payout Ratio
Say a company earns $100 million this year and makes $50 million in dividend payments to its shareholders. In this case, its dividend payout ratio would be 50%.