What is the Dividend Payout Ratio?
The dividend payout ratio is the percentage of a company’s earnings that is distributed to shareholders as dividends.
It provides insights into how much of the company’s profits are being returned to shareholders versus being reinvested in the business.
Definition and Importance
- Definition: The dividend payout ratio is calculated by dividing the annual dividend per share (DPS) by the earnings per share (EPS).
Dividend Payout Ratio=DPSEPS×100\text{Dividend Payout Ratio} = \frac{\text{DPS}}{\text{EPS}} \times 100
- Importance: This ratio is crucial for assessing dividend sustainability and a company’s dividend policy. A balanced payout ratio indicates that a company is returning value to shareholders while retaining enough earnings for growth and financial stability.