Dividend payout ratio is the fraction of net income a firm pays to its stockholders in dividends:



The part of the earnings not paid to investors is left for investment to provide for future earnings growth. Investors seeking high current income and limited capital growth prefer companies with high Dividend payout ratio. However investors seeking capital growth may prefer 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. As they mature, they tend to return more of the earnings back to investors. Note that dividend payout ratio is calculated as EPS

Earnings per share

Earnings per share is the amount of earnings per each outstanding share of a company's stock.In the United States, the Financial Accounting Standards Board requires companies' income statements to report EPS for each of the major categories of the income statement: continuing operations,...

/DPS.

According to Financial Accounting by Walter T. Harrison, the calculation for the payout ratio is as follows:

Payout Ratio = (Dividends - Preferred Stock Dividends)/Net Income

The dividend yield

Dividend yield

The dividend yield or the dividend-price ratio on a company stock is the company's total annual dividend payments divided by its market capitalization, or the dividend per share, divided by the price per share. It is often expressed as a percentage...

 is given by earnings yield

Earnings yield

Earnings yield is the quotient of earnings per share divided by the share price. It is the reciprocal of the P/E ratio.The earnings yield is quoted as a percentage, allowing an easy comparison to going bond rates.-Applications:...

 times DPR:


Conversely, the P/E ratio

P/E ratio

The P/E ratio of a stock is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share...

 is the Price/Dividend ratio times the DPR.

Impact of buybacks

Some companies chose stock buybacks as an alternative to dividends, in such cases this ratio becomes less meaningful. One way to adapt it using an augmented payout ratio:

Augmented Payout Ratio = (Dividends + Buybacks)/ Net Income for the same period

Historic Data

The data for S&P 500 is taken from . The payout rate has gradually declined from 90% of operating earnings in 1940s to about 30% in recent years.

Decade	Price %	Dividend	Total	Dividends as %	Average
	Change	Contribution	Return	of Total Return	Payout
1930s	-41.90%	56.00%	14.10%	N/A	90.10%
1940s	34.8	100.3	135.1	74.20%	59.4
1950s	256.7	180	436.7	41.2	54.6
1960s	53.7	54.2	107.9	50.2	56
1970s	17.2	59.1	76.3	77.5	45.5
1980s	227.4	143.1	370.5	38.6	48.6
1990s	315.7	95.5	411.2	23.2	47.6
2000s	-15	8.6	-6.4	N/A	32.3
Average	106.10%	87.10%	193.20%	50.80%	54.30%

For smaller growth companies, the average payout ratio can be as low as 10%

See also

• Dividend
  Dividend
  Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business , or it can be distributed to...
  
  
• Dividend yield
  Dividend yield
  The dividend yield or the dividend-price ratio on a company stock is the company's total annual dividend payments divided by its market capitalization, or the dividend per share, divided by the price per share. It is often expressed as a percentage...
  
  
• Liquidating dividend
  Liquidating dividend
  A liquidating distribution, sometimes called a liquidating dividend, is a type of nondividend distribution made by a corporation to its stockholders during its partial or complete liquidation. Like nondividend distributions, they are not paid out of the earnings and profits of the corporation...
  
  
• Special dividend
  Special dividend
  A special dividend is a payment made by a company to its shareholders that the company declares to be separate from the typical recurring dividend cycle, if any, for the company. Usually when a company raises its normal dividend, the investor expectation is that this marks a sustained increase...
  
  
• Sustainable growth rate
  Sustainable growth rate
  According to PIMS an important lever of business success is growth. Among 37 variables, growth is mentioned as one of the most important variables for success: market share, market growth, marketing expense to sales ratio or a strong market position.The question how much growth is sustainable is...
  
  
• Retention ratio
  Retention ratio
  Retention Ratio indicates the percentage of a company's earnings that are not paid out in dividends but credited to retained earnings. It is the opposite of the dividend payout ratio, so that also called the retention rate....