Sunday, April 7, 2013

What is Dividend Payout Ratio ?

Dividend payout ratio measures what company pays out to investors in the form of dividends. It can also be defined as the a fraction of net income a firm pays to its stockholders in dividends.


You can also calculate the DPR by dividing the Annual Dividends per Share by the Earnings per Share.

For example, if a company paid out $1 per share in annual dividends and had $3 in EPS, the DPR would be 33%. ($1 / $3 = 33%)

The real question is whether 33% is good or bad and that is subject to interpretation. Growing companies will typically retain more profits to fund growth and pay lower or no dividends.

Companies that pay higher dividends may be in mature industries where there is little room for growth and paying higher dividends is the best use of profits (utilities used to fall into this group, although in recent years many of them have been diversifying).