Dividend Payout Ratio

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#### Examples

Example 1:
Calculate the dividend payout ratio of Kibosh, Ltd. when:

• Earnings per share = \$4
• Dividend per share = \$1.5
• Dividend payout ratio = dividend per share ÷ earnings per share = \$1.50 ÷ \$4 = 0. 38

Example 2:
Calculate the plowback ratio for Kibosh, when:

• Retained earnings per share (reinvested in company) = \$2.50
• Earnings per share = \$4
• Plowback ratio = Retained earnings per share ÷ earnings per share = \$2.5 ÷ \$4.0 = 0.625
• OR 1.00 – dividend payout ratio = 1.00 – 0.38 = 0.62

#### Overview

Shareholders have two sources of return: periodic income in the form of dividends and increased value of companies in the form of shares. The dividend payout ratio indicates how much of a company’s total earnings come from each of these sources. Dividend payout ratio tells what percentage of total earnings the company is paying back to shareholders. It is a measure of how much earnings a company pays to its shareholders and how much it keeps to grow the company. In this way, ratio values give investors insight into what kinds of income they might expect.

The plowback ratio (also called the retention rate) equals the retained divided earnings by total earnings for the period. Dividend payout ratios can also be calculated as the value of total dividends divided by total net income.

#### Analysis

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 values. However investors seeking capital growth tend to prefer lower payout ratios, because capital gains are taxed at a lower rate. Actual ratio values reflect the maturity of a company, that is, how long it’s been in business. High-growth firms in early stages of their development generally have low or zero ratio values. As these businesses mature, they tend to return more of the earnings to investors as dividends.