Dividend Payout Ratio

The Dividend Payout Ratio is used to determine the percentage of earnings that are given to the shareholders in the form of dividends.

You can use one of two formulas.

(Dividends Per Share) / (Earnings Per Share) or

(Total Dividends) / (Net Income)

This looks at how the dividends are supported by its earnings. It also shows where the company is spending its money.

If the Dividend Payout ratio is too high it could work against the investor. Say the ratio is at 60% that means 60% of its earnings are going to pay its share holders. That also means 60% that could have been reinvested into making the company grow was paid out.

This could result in a lower growth rate. In this rate you will be giving up growth for dividends. That is not always bad if you want a stock that produces an income but doesn’t need to grow that much.

Just be aware that higher ratios could mean lower growth.