Payout ratio: how to use it to your advantage? MintGenie explains

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For a number of companies, paying dividends is a matter of pride. Many companies have been paying dividends to their shareholders for decades. A dividend is a reward companies pay to their shareholders for investing in their stock. It is an amount paid at regular intervals to shareholders from the profits of the company.

The company’s board of directors decides on an amount it wishes to pay out to shareholders from its profits. However, it is not mandatory for every company to pay a dividend.

Dividend payout ratio

A payout ratio is the ratio between the total dividends paid by the company and its net profit for a given period. It is basically the percentage of profits that have been distributed to shareholders as dividends.

For example, if the company’s dividend payout ratio is 20%. This implies that it paid out 20% of its total profits as dividends to shareholders while retaining the remaining 80%.

The amount not paid out as dividends is used for corporate purposes such as expansion, research and development, debt repayment, operational investments, etc. This amount is called retained earnings.

READ MORE: Dividend-yielding funds that have returned more than 20% in the past year

Calculations

A dividend payout ratio is calculated by dividing the total dividends paid during a given period by the company’s earnings during that period.

Payout ratio = Dividends paid / Net profit

For example, if a company paid 20 lakh in dividends in a quarter and has a net profit of 1.2 crore during this period. Then the payout ratio will be 20,00,000/1,20,00,000 = 0/16 or 16.66%.

Another way to calculate the ratio is on a per share basis. You do this by dividing the dividend per share by the earnings per share.

Dividend payout ratio = Dividends per share/earnings per share

Earnings per share = Net earnings / total number of shares outstanding

For example, a company announced a dividend of 2 per share and has 20 lakh shares outstanding in total. Winnings came out at 1 crore.

So first EPS = 1,00,00,000/20,00,000 = 5

and Payout Ratio = 2/5 = 0.4 or 40%

The payout ratio is 0% for companies that do not pay dividends and 100% for companies that pay all of their net income in the form of dividends.

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