Financial Statement Analysis
- Ratio Analysis of Financial Statements (Formula, Types, Excel)
- Ratio Analysis Advantages
- Ratio Analysis
- Liquidity Ratios
- Cash Ratio
- Cash Ratio Formula
- Quick Ratio
- Quick Ratio Formula
- Current Ratio
- Current Ratio Formula
- Acid Test Ratio Formula
- Defensive Interval Ratio
- Working Capital Ratio
- Working Capital Formula
- Net Working Capital Formula
- Changes in Net Working Capital
- Cash Flow from Operations Ratio
- Cash Reserve Ratio
- Operating Cycle Formula
- Current Ratio vs Quick Ratio
- Bid Ask Spread
- Liquidity vs Solvency
- Solvency Ratios
- Equity Ratio
- Capital Adequacy Ratio
- Liquidity Risk
- Altman Z Score
- Turnover Ratios
- Inventory Turnover Ratio
- Accounts Receivable Turnover
- Accounts Receivables Turnover Ratio
- Accounts Payable Turnover Ratio
- Days Inventory Outstanding
- Days in Inventory
- Days Sales Outstanding
- Average Collection Period
- Days Payable Outstanding
- Cash Conversion Cycle
- Cash Conversion Cycle (CCC) Formula
- Fixed Asset Turnover Ratio Formula
- Debtor Days Formula
- Working Capital Turnover Ratio
- Profitability Ratios
- Profitability Ratios Formula
- Common Size Income Statement
- Vertical Analysis of Income Statement
- Profit Margin
- Gross Profit Margin Formula
- Gross Profit Percentage
- Operating Profit Margin Formula
- EBIT Margin Formula
- Operating Income Formula
- Net Profit Margin Formula
- EBIDTA Margin
- Degree of Operating Leverage Formula (DOL)
- NOPAT Formula
- Earnings Per Share
- Basic EPS
- Diluted EPS
- Basic EPS vs Diluted EPS
- Return on Equity (ROE)
- Return on Capital Employed (ROCE)
- Return on Invested Capital (ROIC)
- Return on Sales
- ROIC Formula (Return on Invested Capital)
- Return on Investment Formula (ROI)
- ROIC vs ROCE
- ROE vs ROA
- Cash on Cash Return
- Return on Total Assets (ROA)
- Return on Average Capital Employed
- Capital employed Employed
- Return on Average Assets (ROAA)
- Return on Average Equity (ROAE)
- Return on Assets Formula
- Return on Equity Formula
- DuPont Formula
- Net Interest Margin Formula
- Earnings Per Share Formula
- Diluted EPS Formula
- Contribution Margin Formula
- Unit Contribution Margin
- Revenue Per Employee Ratio
- Operating Leverage
- EBIT vs EBITDA
- Capital Gains Yield
- Tax Equivalent Yield
- LTM Revenue
- Operating Expense Ratio Formula
- Overhead Ratio Formula
- Variable Costing Formula
- Capitalization Rate
- Cap Rate Formula
- Comparative Income Statement
- Capacity Utilization Rate Formula
- Total Expense Ratio Formula
- Efficiency Ratios
- Dividend Ratios
- Debt Ratios
- Debt to Equity Ratio
- Debt Coverage Ratio
- Debt Ratio
- Debt to Asset Ratio Formula
- Coverage Ratio
- Coverage Ratio Formula
- Debt to Income Ratio Formula (DTI)
- Capital Gearing Ratio
- Capitalization Ratio
- Interest Coverage Ratio
- Times Interest Earned Ratio
- Debt Service Coverage Ratio (DSCR)
- DSCR Formula (Debt service coverage ratio)
- Financial Leverage Ratio
- Financial Leverage Formula
- Degree of Financial Leverage Formula
- Net Debt Formula
- Leverage Ratios
- Leverage Ratios Formula
- Operating Leverage vs Financial Leverage
- Current Yield
- Debt Yield Ratio
- Solvency Ratio Formula
Dividend Payout Ratio Formula
When a company makes a profit at the end of the year, they may share a portion of their profits with the stockholders. We call it the dividend. By using this formula, we find out the percentage of dividend paid to the shareholders out of the net profit for the year.
Here’s this formula –
Example of Dividend Payout Ratio Formula
Let’s look at a practical example of dividend ratio calculation.
Danny Inc. has been in the business for last few years. Recently it started paying its shareholders dividends. It has paid dividends of $140,000 to the shareholders. The net income of Danny Inc. was $420,000 in the last year. Danny Inc. decided to keep retained earnings as 66.67%. Using two methods, find out the dividend ratio of Danny Inc. in the last year.
As mentioned in the example, we will use two methods to calculate this ratio.
First, we will use the first ratio.
- We know that the dividends paid in the last year were $140,000. And the net profit was $420,000.
- Using the first ratio of dividend payout formula, we get –
- Dividend ratio = Dividends / Net Income = $140,000 / $420,000 = 1/3 = 33.33%.
Now, we will use the second ratio.
We know that 66.67% was kept as retained earnings.
- That means the retention ratio is 66.67%.
- Then, using the second method, we get –
- Dividend payout ratio formula = 1 – Retention Ratio = 1 – 66.67% = 1 – 2/3 = 1/3 = 33.33%.
Apply Dividend Payout Ratio Calculation
Let’s look at a practical example to understand the dividend ratio better –
|Dividends ($ bn)||2.49||10.56||11.13||11.56||12.15|
|Net Income ($bn)||41.73||37.04||39.51||53.39||45.69|
|Dividends Payout Ratio||5.97%||28.51%||28.17%||21.65%||26.59%|
Till 2011, Apple didn’t pay any dividend to its investors. Because they believed that if they would reinvest the earnings, they would be able to generate better returns for the investors which they did eventually.
For a company, sharing the profit is an after-thought. First, they decide how much they will reinvest into the company so that the business can grow bigger and the business can multiply the shareholders’ money instead of just sharing it. That’s why this formula is important.
It tells us how much a company is paying dividend to the shareholders. And also how much the company is reinvesting into itself which we call “retained earnings”.
Sometimes, a company doesn’t pay anything to the shareholders because they feel the need to reinvest the profits of the company so that the company can grow faster.
Since the net profits of the company are only used for two purposes, we can conclude that –
If anyone of the above is nil (among retained earnings and dividend payments), the entire profit is distributed or invested in the other.
As we note from above, Colgate Dividend Ratio was 61.78% in 2016-17. However, Amazon, Google, and Berkshire Hathway haven’t paid a penny to the shareholders via Dividends.
If an investor looks at the income statement of the company, she would be able to find the net income for the year. And in balance sheet, retain earnings would be found. If you need to know how the company has calculated the retained earnings and also dividends, you can check the footnotes under the financial statements.
Use of Dividend Payout Ratio Formula
Understanding the equation between retained earnings and dividend payments will help an investor comprehend the short term and the long term goal of a company.
Since many companies also pay 100% dividend, we can also use an alternative formula for calculating the dividend payout ratio.
Here’s the alternative formula –
Retention ratio is the percentage of profits the company keeps for reinvestment.
Looking at the past dividend payout ratio formula, the investors get ensured about how much they may receive in near future.
You can use the following Dividend Payout Ratio Calculator
|Dividend Payout Ratio Formula =||
Dividend Payout Ratio in Excel (with excel template)
Let us now do the same example above in Excel.
This is very simple. You need to provide the two inputs of Dividends and Net Income.
You can easily calculate the ratio in the template provided.
First, we will use the first ratio.
Now, we will use the second ratio.
Dividend Payout Ratio Formula Video
This has been a guide to Dividend Payout Ratio Formula, practical examples and Dividend Payout ratio calculator along with excel templates. You may also have a look at these articles below to learn more about Financial Analysis –