Dividend Payout Ratio Calculator

Dividend Payout Ratio

The ratio of dividends to earnings available for shareholders is called the Dividend Payout Ratio. And this Dividend Payout Ratio Calculator makes this calculation easier. The earnings that the company has left over after the dividend payment are retained for the purpose of reinvestment. And we call it as retained earnings. Therefore, the Retention ratio can be calculated by subtracting the dividend payout ratio from 1 (total earnings).

Formula

For calculating the dividend payout ratio, we divide DPS (Dividend Per Share) from EPS (Earnings Per Share). Hence the Formula can be represented as:

Dividend Payout Ratio = Dividend Per Share / Earnings Per Share

About the Calculator / Features

The dividend payout ratio calculator is a handy online tool that aids in calculating the payout ratio by simply entering the following data:

  • Dividend Per Share
  • Earnings Per Share
Dividend Payout Ratio Calculator

Calculator

How to Calculate using Calculator

The calculator quickly provides the result of the calculation by entering the following details into it:

Dividend Per Share

It is the amount of dividend paid to shareholders. However, it does not include the dividend paid to preference shareholders. We can calculate dividend per share by dividing total dividends distributed among equity shareholders from the total number of equity shares.

You can take the help of our calculator for EPS calculation – Earning Per Share Calculator.

Earnings Per Share

Earnings per share are the net earnings per share after paying off all the expenses and taxes. And we can calculate it by dividing net income less preference dividend from the average number of outstanding equity shares.

You can take the help of our calculator for DPS calculation – Dividend Per Share Calculator.

Example of Payout Ratio

Let us try to understand this concept with the help of an example.

Following is the data of two companies, Alpha Ltd. and Beta Ltd., for three years.

Dividend distributed per share by Alpha Ltd. in Year 1 = $25, Year 2 = $30 and Year 3 = $45. And its earnings per share in Year 1 = $100, Year 2 = $120 and Year 3 = $180.

And the dividends distributed by Beta Ltd. per share in Year 1 = $20, Year 2 = $27 and in Year 3 = $35. While the earnings per share in respective years is as follows: Year 1 = $80, Year 2 = $90 and Year 3 = $105.

Dividend Payout Ratio of Alpha Ltd.

YearsDividend Per ShareEarnings Per ShareDividend Payout Ratio
1$25$10025%
2$30$12025%
3$45$18025%

Dividend Payout Ratio of Beta Ltd.

YearsDividend Per ShareEarnings Per ShareDividend Payout Ratio
1$20$8040%
2$27$9030%
3$35$10533.33%

Interpretation

A company having a higher dividend payout ratio is said to be better than one having a lower ratio. However, this may not be true at times. In the above example, Alpha Ltd. is distributing dividends at a constant rate of 25%, while the distribution made by Beta Ltd. is fluctuating. It states that Alpha Ltd. is more trustworthy than Beta Ltd. There could be a possibility of the Payout Ratio declining in next year, or it can also go up. However, predicting this seems to be a difficult task as it depends on several factors.

The key, however, remains the performance of the company, dividend consistency policy, and the opportunities available to the company for deploying the retained earnings gainfully.

Alternative Method at a Company Level

In the above calculator, we discussed and attempted to calculate the dividend payout ratio at the share level, largely applicable for investors and individual shareholders. However, for the purpose of analysis, company valuations, cash flow perspective, and so on, we can calculate the dividend payout ratio at a Unit/Company Level. And this can be calculated by simply dividing the total dividend quantum or outgo by the earnings after the preference dividend. The formula would be:

Dividend Payout Ratio = (Number of Equity Shares*Dividend Per Share)/Earnings after deducting the Preference Dividend.

In this calculation, we need the following details and steps:

  1. Total or Average Number of Equity Shares of the company during the year, eligible for Dividend.
  2. Dividend per share.
  3. The above multiplication will give us the total quantum of dividends paid or proposed to be paid.
  4. Total Earnings of the company after deducting the preference dividend paid or payable.
  5. And finally, we divide the dividend quantum as per point 3 from the earnings available as per point 4. This will be the dividend payout ratio and is usually expressed as a percentage.

Example

Let us review the above example of Alpha Ltd to calculate this ratio at the company level. For this purpose, we need to know the total number of equity shares of Alpha Ltd, which we assume as 1,000,000 Shares. The EPS for the year 1 is given as $100, and Dividend Per Share for the same year is given as $25. Let us now calculate the Dividend Payout Ratio as per the alternate method.

Total Dividend Quantum = 100000*25 (No of Shares*Dividend per share) = $25000000

Total Earnings after Preference Dividend = 1000000*$100 (No of Shares*EPS)=$100000000

Dividend Payout Ratio = $25,000,000/$100,000,000 = 1:4 or 25%

Calculator

Cautions

Thus the dividend payout ratio tells us how many portions of the earnings of the company are being paid to the equity shareholders. Analyzing the same over the years can give us the status of whether it is increasing/decreasing and what relation it has with the earnings. While analyzing a company on the basis of its payout ratio, one has to be very careful and should look at other factors too that affect the earnings of the company. For example, a new start up company may distribute a low dividend but may have high earning potential. Therefore, no one ratio should be considered in isolation before making investment decisions.



Sanjay Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

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