dividend payout ratio

(noun)

The fraction of net income an organization pays out to investors.

Examples of dividend payout ratio in the following topics:

  • Dividend Payments and Earnings Retention

    • The dividend payout and retention ratios offer insight into how much of a firm's profit is distributed to shareholders versus retained.
    • Dividend payout ratio is the fraction of net income a firm pays to its stockholders in dividends:
    • These retained earnings can be expressed in the retention ratio.
    • Retention ratio can be found by subtracting the dividend payout ratio from one, or by dividing retained earnings by net income.
    • The dividend payout ratio is equal to dividend payments divided by net income for the same period.
  • Setting the Target Payout Ratio

    • The Target Payout Ratio, or Dividend Payout Ratio, is the fraction of net income a firm pays to its stockholders in dividends.
    • Investors seeking high current income and limited capital growth prefer companies with high Dividend Payout Ratios.
    • However investors seeking capital growth may prefer lower payout ratios.
    • High growth firms in early life generally have low or zero payout ratios.
    • For smaller growth companies, the average payout ratio can be as low as 10%
  • Performance per Share

    • Valuation ratios describe the value of shares to shareholders, and include the EPS ratio, the P/E ratio, and the dividend yield ratio.
    • Dividend Payout ratio shows the portion of earnings distributed to stockholders.
    • Dividend payout ratio is the fraction of net income a firm pays to its stockholders in dividends: Dividend Payout Ratio = Dividends / Net Income for the Same Period.
    • Investors seeking high current income and limited capital growth prefer companies with a high dividend payout ratio.
    • High growth firms in early life generally have low or zero payout ratios.
  • The Cost of Retained Earnings

    • Due to the relationship between retained earnings and dividends, the cost of retained earnings as a source of capital is relative to the overall cost of equity.
    • Retained earnings indicate the amount of capital remaining after profits or losses from net income are paid out to investors and shareholders via dividends.
    • Understanding the equation to determine the retention ratio adds some clarification for this point:
    • ${\displaystyle {\mbox{Retention Ratio}={\frac {\mbox{Retained Earnings}}{\mbox{Net Income}}}}={\displaystyle {\mbox{1 - Dividend Payout Ratio}}}}$
    • The dividend payout ratio is a useful addition to the above equation, and is written as:
  • Relationship Between Dividend Payments and the Growth Rate

    • Capital is distributed to investors via dividend payments and, indirectly, through capital gains.
    • Put succinctly, investors seeking high current income and limited capital growth prefer companies with a high dividend payout ratio.
    • However, investors seeking higher capital growth may prefer a lower payout ratio because capital gains are taxed at a lower rate.
    • High growth firms in early life generally have low or zero payout ratios in order to reinvest as much of their earnings as possible.
    • Note that dividend payout ratio is calculated as dividend per share divided by earnings per share.
  • Market Reporting

    • With this information, along with a company's consolidated financial statements, the following ratios and calculations can be performed:
    • Dividend yield on common stock ratio=Dividend per share of common stock
    • Payout ratio on common stock = Dividend per share of common stock
    • By comparing the above ratios with those of other companies, investors, accountants, and forecasters can determine the position and health of their respective company's stock.
  • Defining Dividends

    • Dividend yield refers the ratio between dividends per share and the market price of each share, and it is expressed in terms of percentage.
    • Payout ratio is calculated by dividing the company's dividend by the earnings per share.
    • A payout ratio greater than 1 means the company is paying out more in dividends for the year than it earned, while a low payout ratio indicates that the company is retaining a greater proportion of their earnings instead of paying out dividends.
    • These ratios have historically been used as indicators of a stock's investment strength and the company's overall performance.
    • In-dividend date is the last day, which is one trading day before the ex-dividend date, where the stock is said to be cum dividend ('with [including] dividend').
  • Ratio Analysis and EPS

    • If preferred dividends total $100,000, then that is money not available to distribute to each share of common stock.
    • Return on assets (ROA ratio or Du Pont Ratio): Net income / Average total assets
    • The EPS formula does not include preferred dividends for categories outside of continued operations and net income.
    • Earnings per share for continuing operations and net income are more complicated in that any preferred dividends are removed from net income before calculating EPS.
    • Ratio analysis includes profitability ratios, activity (efficiency) ratios, debt ratios, liquidity ratios and market (value) ratios
  • Value of a Low Dividend

    • Low dividend payouts can be interpreted in a number of ways, including: as a leading indicator of future growth or a sign of instability.
    • Therefore, taxation benefit is another point in favor of low dividend payouts .
    • There are a number of ways to interpret this ratio.
    • A ratio of 2 or higher is considered safe—in the sense that the company can well afford the dividend—but anything below 1.5 is risky.
    • If the ratio is under 1, the company is using its retained earnings from a previous year to pay this year's dividend, which signals the risk of instability and poor performance of the firm.
  • Investor Preferences

    • The significance of investors' dividend preferences is a contested topic in finance that has serious implications for dividend policy.
    • Assuming dividend relevance, coming up with a dividend policy is challenging for the directors and financial manager of a company because different investors have different views on present cash dividends and future capital gains.
    • Investor preferences are first split between choosing dividend payments now, or future capital gains in lieu of dividends.
    • High versus low payout, 2.
    • Stable versus irregular dividends, and 3.
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