Dividend payout ratio

The dividend payout ratio is the fraction of net income a firm pays to its stockholders in dividends:

${\textstyle {\mbox{Dividend payout ratio}}={\frac {\mbox{Dividends}}{\mbox{Net Income for the same period}}}}$

The part of 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 a high dividend payout ratio. However, investors seeking capital growth may prefer a lower payout ratio because capital gains are taxed at a lower rate. High growth firms in early life generally have low or zero payout ratios. As they mature, they tend to return more of the earnings back to investors. The dividend payout ratio is calculated as DPS/EPS.

According to Financial Accounting by Walter T. Harrison, the calculation for the payout ratio is as follows:

Payout Ratio = (Dividends - Preferred Stock Dividends)/Net Income

The dividend yield is given by earnings yield times the dividend payout ratio:

${\displaystyle {\begin{array}{lcl}{\mbox{Current Dividend Yield}}&=&{\frac {\mbox{Most Recent Full-Year Dividend}}{\mbox{Current Share Price}}}\\&=&{\frac {{\mbox{Dividend payout ratio}}\times {\mbox{Most Recent Full-Year earnings per share}}}{\mbox{Current Share Price}}}\\\end{array}}}$

Conversely, the P/E ratio is the Price/Dividend ratio times the DPR.