What is the dividend payout ratio?

Why the ratio matters to investors

How to calculate a payout ratio

What is a good payout ratio?

When is a ratio too high?

Funds and dividend payouts

Dividend payout ratio vs. dividend yield

The bottom line

LearnDividendsHow to Calculate a Dividend Payout Ratio

# How to Calculate a Dividend Payout Ratio

Jun 21, 2022

·

The dividend payout ratio is that proportion of earnings a company decides to pay shareholders as dividends. The proportion it retains is called the retention ratio.

Every publicly traded company faces a decision when it prepares its periodic earnings reports: what to do with the earnings? Keep them to reinvest in the business? Or reward shareholders by passing along earnings in the form of dividends?

Companies try to strike a balance between the need to retain earnings for maintaining or expanding operations, and the need to give something back to shareholders, who are the collective owners of the company. This balance can be represented by a company’s dividend payout ratio.

## What is the dividend payout ratio?

The dividend payout ratio is that proportion of earnings a company decides to pay shareholders as dividends. The proportion it retains is called the retention ratio. Each ratio is expressed as a percentage, and together they add up to 100% of a company’s net income. Dividends are typically paid in cash, although sometimes there are other forms of payment.

Here’s a simple illustration: A company reports \$1 million in quarterly earnings and the board of directors approves \$250,000 as a dividend payment. This means the dividend payout ratio is 25%, or \$250,000 divided by \$1,000,000. The other \$750,000 is retained, for a 75% retention ratio.

## Why the ratio matters to investors

Payout ratios can vary based on a wide range of factors, and investors consider them (and retention ratios) when deciding which kinds of companies to own. Companies can be classified based on whether they have a high or low payout ratio.

A high payout ratio indicates that a relatively high share of earnings flow to investors as dividends. Older, well-established companies tend to make bigger dividend payouts. They have already achieved growth, and they often have a large market share in their businesses, which generate reliable earnings and cash flow. They generally need to retain less of their earnings for reinvestment or expansion. Examples include Coca-Cola, with a payout ratio of about 80%; Procter & Gamble, at 60%; and Verizon, at 48%.

A low ratio generally means a company wants retained earnings to reinvest for aggressive growth and reward investors through a higher stock price. Some examples of lower-payout companies include Apple, with a ratio of about 15%; and Microsoft, at 26%.

Companies that are unprofitable or don’t pay dividends won’t have a payout ratio. Among the biggest companies with no dividends are Alphabet (Google), Amazon, Netflix, and Tesla.

The average payout ratio among S&P 500 companies was 28.2% in 2021, the lowest in a decade because earnings grew faster than dividends. Payout ratios tend to increase during economic slowdowns as companies maintain dividends even with declining earnings; the ratios tend to decrease during expansions when earnings gains outpace dividend growth.

## How to calculate a payout ratio

There are a few ways to calculate a payout ratio, some of them more complicated than others. The simplest and handiest is to divide per-share dividends by per-share earnings (or net income divided by the number of shares outstanding). Annual per-share numbers are generally used, and are readily available from various public sources. Imagine a company, ABC Corp., with annual profit of \$4.50 a share and dividends of \$1.50 a share. The calculation for the payout ratio is:\$1.50 dividends/\$4.50 earnings = 0.33 or 33%Investors also can estimate future dividends by applying the ratio to a forecast of per-share earnings, assuming the company maintains a steady dividend policy. So if the forecast for ABC earnings next year is, let’s say, \$5.25 a share, and the payout ratio is 33%, estimated dividends in the coming year would be: \$5.25 X 0.33 = \$1.73 per share

At Titan, we are value investors: we aim to manage our portfolios with a steady focus on fundamentals and an eye on massive long-term growth potential. Investing with Titan is easy, transparent, and effective.

Get Started

## What is a good payout ratio?

There is no good or bad payout ratio, per se. It may depend on trends in the industry or a company’s particular circumstances. Companies that are organized as partnerships or trusts, for instance energy master limited partnerships and real estate investment trusts (REITs), are required by law to pay out almost all of their earnings to shareholders.

Sustainability of payouts is key. Apple is a good example. The company resumed paying dividends in 2012, after a 17-year interruption. It has steadily increased the dividend since then, yet the payout ratio is only about 15%, giving the world’s most valuable company by market value ample room to continue paying dividends and have plenty left for reinvestment in the business.

Investors consider several things when evaluating a payout ratio:

• The age and maturity of a company, and its industry.

Maturity refers to the stage of a company’s life. Younger companies are often in industries such as biotechnology, digital finance and e-commerce, and tend to have low payouts or no payouts. Older companies include Coca-Cola, IBM, and 3M.

• The company’s financial condition.

Has it had recent successes, or setbacks? Is it gaining or losing market share in its industry?

• Payout ratio history.

Investors may ask: Is the payout consistent? Is the ratio relatively low with room to grow, or is it already high? Or is a high payout ratio a warning sign for a later dividend cut?

## When is a ratio too high?

A red flag is when a company is paying more in dividends than it makes in profit (a 100% or higher payout ratio). Market professionals consider this an unsustainable dividend.

General Electric, Boeing, and automakers General Motors and Ford are among notable companies that were forced to cut or suspend dividend payments in recent years. Boeing and the automakers stopped dividend payments in early 2020 with the onset of the Covid pandemic, and GE was undergoing an extensive reorganization that included spinning off several businesses into separate companies. It reduced its payout to 1 cent a share, or 8 cents after a 1-for-8 reverse stock split. In December 2021, Ford resumed its dividend payment.

## Funds and dividend payouts

Investors also can get dividends indirectly from mutual funds (as well as index funds and exchange-traded funds) that have dividend-paying stocks among their holdings. Funds are required to pass along any dividends to their holders, at least once a year.

Investors may take the dividends in cash or reinvest them in the fund. Reinvestment is an attractive option if the investor has an individual retirement account (IRA), 401(k) or other tax-advantaged retirement account. Otherwise, dividends are taxable, either as ordinary income or as capital gains, depending on circumstances.

## Dividend payout ratio vs. dividend yield

Dividend yield is the amount of dividend income a stock investment generates, expressed as a percentage of the price of a share. So if ABC Corp.’s annual dividend is \$1.50 per share and its shares are trading at \$45, the dividend yield is:

\$1.50/\$45 = 0.033 or 3.3%

Another way to think of this: For every \$1 invested in the shares of ABC, an investor buying at \$45 earns a return of 3.3 cents a year.

Dividend yield fluctuates with the share price, and a company has no direct control over the dividend yield.

Payout ratio, by contrast, is determined by the company, not the markets. It is driven by the company’s earnings and the management’s strategy and planning, and its decisions about keeping or sharing the earnings.

## The bottom line

Dividend payout ratios may get less attention than dividend yields, but they can offer more fundamental information to investors such as a company’s financial strength, its life-cycle stage, and its strategy for use of earnings and cash flow. These are key considerations for investors in screening stocks for income potential from dividends, growth potential and capital gains from higher stock prices.If you’re ready to start growing your capital, Titan is ready for you. Our team of exceptional investment analysts manage hundreds of millions of dollars, investing our clients in actively-managed, long-term strategies with an eye on massive growth potential. Through our award-winning app, you’ll ride shotgun with some of the smartest investment minds in the business. Sign-up takes minutes: get started today.

Disclosures

Certain information contained in here has been obtained from third-party sources. While taken from sources believed to be reliable, Titan has not independently verified such information and makes no representations about the accuracy of the information or its appropriateness for a given situation. In addition, this content may include third-party advertisements; Titan has not reviewed such advertisements and does not endorse any advertising content contained therein.

This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any strategy managed by Titan. Any investments referred to, or described are not representative of all investments in strategies managed by Titan, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results.

Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see Titan’s Legal Page for additional important information.

Three Things, a newsletter from Titan

Stay informed on the most impactful business and financial news with analysis from our team.

You might also like

Are Reinvested Dividends Taxable?

Retirement accounts are the way investors can reinvest dividends that compound the growth of their nest eggs, while minimizing the impact of taxes.

What Is a Dividend Reinvestment Plan? Drip Investing Overview

DRIPs allow investors to use their dividends to buy more shares of the company or fund without having to actively initiate a transaction.

What Is Dividend Per Share and How Is It Calculated?

Dividends per share is the amount of money a company pays out in the form of dividends for each share. To derive this figure, the total amount paid in dividends is divided by the total number of shares outstanding.

What Is a Disbursement? Definition & Examples

Disbursements are payments from a company or another payer and are generally issued to a smaller recipient in the forms of cash, check, electronic transfer, or other.

Cash Management

Smart Cash

Smart Cash FAQs

Cash Options

Get Smart Cash

Titan Global Capital Management USA LLC ("Titan") is an investment adviser registered with the Securities and Exchange Commission (“SEC”). By using this website, you accept and agree to Titan’s Terms of Use and Privacy Policy. Titan’s investment advisory services are available only to residents of the United States in jurisdictions where Titan is registered. Nothing on this website should be considered an offer, solicitation of an offer, or advice to buy or sell securities or investment products. Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections are hypothetical in nature and may not reflect actual future performance. Account holdings and other information provided are for illustrative purposes only and are not to be considered investment recommendations. The content on this website is for informational purposes only and does not constitute a comprehensive description of Titan’s investment advisory services.

Please refer to Titan's Program Brochure for important additional information. Certain investments are not suitable for all investors. Before investing, you should consider your investment objectives and any fees charged by Titan. The rate of return on investments can vary widely over time, especially for long term investments. Investment losses are possible, including the potential loss of all amounts invested, including principal. Brokerage services are provided to Titan Clients by Titan Global Technologies LLC and Apex Clearing Corporation, both registered broker-dealers and members of FINRA/SIPC. For more information, visit our disclosures page. You may check the background of these firms by visiting FINRA's BrokerCheck.

Various Registered Investment Company products (“Third Party Funds”) offered by third party fund families and investment companies are made available on the platform. Some of these Third Party Funds are offered through Titan Global Technologies LLC. Other Third Party Funds are offered to advisory clients by Titan. Before investing in such Third Party Funds you should consult the specific supplemental information available for each product. Please refer to Titan's Program Brochure for important additional information. Certain Third Party Funds that are available on Titan’s platform are interval funds. Investments in interval funds are highly speculative and subject to a lack of liquidity that is generally available in other types of investments. Actual investment return and principal value is likely to fluctuate and may depreciate in value when redeemed. Liquidity and distributions are not guaranteed, and are subject to availability at the discretion of the Third Party Fund.

The cash sweep program is made available in coordination with Apex Clearing Corporation through Titan Global Technologies LLC. Please visit www.titan.com/legal for applicable terms and conditions and important disclosures.

Cryptocurrency advisory services are provided by Titan.

Information provided by Titan Support is for informational and general educational purposes only and is not investment or financial advice.

Contact Titan at support@titan.com. 508 LaGuardia Place NY, NY 10012.