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What Is a Dividend Payout Ratio?

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  • Written By: Luke Arthur
  • Edited By: C. Wilborn
  • Last Modified Date: 24 August 2014
  • Copyright Protected:
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A dividend payout ratio is an important financial metric that is used by investors in order to evaluate company stock. With this ratio, an investor can determine exactly how much money is being paid out of the earnings in the form of dividends. This can be beneficial for investors who want to create a steady source of income for themselves by investing in dividend stocks. The ratio can also tell investors a lot about the financial stability of a company.

A simple formula is used to calculate dividend payout ratio. An investor can take the dividend per share of a company and divide it by the earnings per share. This tells investors exactly how much of the earnings per share are given back to the investor in the form of dividends. When evaluating a company, most investors would like to see a high ratio. This tells investors that the company is putting a high priority on paying out dividends to the investors.

There are many investors who utilize an investment strategy of trying to receive regular dividends. Dividends are essentially a way for companies to share the wealth with their investors. When a company announces a dividend on the declaration date, the owner of the stock on the ex-dividend date will receive a payment from the company. These payments are very attractive to many investors because it provides a passive source of income regardless of how the stock price of the company fluctuates.

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Investors who utilize this strategy commonly used the dividend payout ratio in order to evaluate a company. Companies with high ratios generally put an emphasis on paying a large amount of money back to the shareholders. As an investor, this can be very appealing and indicate a company that values its investors.

The dividend payout ratio also gives investors and analysts a good idea of the financial strength of a company. In most cases, if the dividend payout ratio is high, it means that the company is strong financially. Most companies who issue regular dividends are well-established and are not worried about running into financial problems in the future. If a company has a low dividend payout ratio, it could mean that the company is holding onto extra cash in order to prepare for hard times in the industry.

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