In our previous article, we have discussed how to calculate dividend per share and the difference between DPS & EPS. In this article, we will be discussing dividend payout ratio.
The ratio of earnings paid out to shareholders as a dividend is calculated as dividend payout ratio. In other words, it’s a percentage of earnings paid to shareholders as a dividend.
DPR is calculated by dividing declared dividends paid during a period by net earnings for the period. It’s reciprocal of retention ratio, which measures the percentage of profit a company retains for reinvestment in projects to generate future growth.
Dividend Payout Ratio or DPR = Dividends / Net Income
DPS / EPS
1 – Retention ratio
Dividend Payout Ratio or DPR will let you know how much money a company is returning or gives back to shareholders, versus how much retained to reinvest in growth.
If a company has zero payout ratio then you can conclude that it has not paid a dividend and retained 100% of profit.
A high Payout Ratio means the company is reinvesting less amount of profit in future growth which will result in less capital gain in future periods. Similarly, low DPR means, company is planning to reinvest higher amount of profit for future growth.
For example, let’s assume that a company has distributed Rs. 1 per share as dividend and its earnings per share is Rs 10. In this case, company’s DPR is 1/10 = 10%. This means, company has retained 90% (100%-10%) of the profit for future and 10% paid to shareholders by way of dividend. In this case, dividend payout ratio or DPR is 10% and retention ratio is 90%.
If you are an income-oriented investor and do not prefer capital growth then dividend payout ratio should be a closely-watched financial measure. An investor seeking capital growth may prefer companies with low payout ratio.
Dividend Payout Ratio is used by some investors when considering whether to invest in a company that pays out high dividends versus a profitable company that has high growth potentials with less payout.
You can get details of total dividends paid, EPS and company’s net income from the reported financial statement.