Algo Trading Byte

In the previous article we covered major categories of financial ratios, if you have not read the article, you might read by visiting this link. In this article we will deep dive into understanding the first Market Value Ratios namely the dividend payout ratio.

Dividend Payout Ratio

It’s a very simple fundamental metrics that explains what percentage of the profit made by the company has been given as dividend.

Dividend Payout Ratio = Annual Dividend Per Share/ Earnings Per share

The dividend payout ratio can also be calculated as:

Dividend Payout Ratio = Total Dividend Paid / Net income

Let’s try to understand with a simple example, Suppose ABC corporation made $ 0.75 per share earnings and paid $0.34 as dividend per share. So the dividend payout ratio would be

Dividend Payout = 0.34/0.75 = 45.33 %

We can also calculate using total dividends and net income. Suppose the company made $750000 total net income and $340000 was paid as dividend in the calendar year then

Dividend Payout = 340000/750000 = 45.33%

Now, this metrics plays key role in stock selection for investors, traders, fund managers and can have various interpretations. This metric can be compared with other peer companies that are operating in the same field, segment. Also it can be compared with average industry standard. It also shows how well the earnings of a company justifies it’s dividend payout. More mature companies would have high dividend payout ratios, while the growth companies will have less to nil dividend payout ratios because they would like to retain more of their earnings and reinvest in the growth of the company.

In our next article we will discuss in depth another Market Value Ratio i.e., Dividend Yield.