Dividend Payout Ratio

Dividend Payout Ratio is a type of Profitability Ratio that determines the Dividend paid by a company on each share relative to the Earning Per Share (EPS) of the company. Dividend Payout Ratio shows a company’s policy of dividend and the growth in Equity.
Dividend Payout Ratio = Dividend per Share / Earnings per Share
Where,
  • Dividend Per Share is the Dividend declared by the company on each share.
  • And EPS = Net Profit / Total Number of Common Equity

Significance and Interpretation

  • The dividend Payout Ratio is the percentage of earnings that a company distributes among the Shareholders.
  • A higher Dividend Payout Ratio implies that a higher portion of the earning of the company is distributed among the Shareholders, hence a higher Dividend Payout Ratio attracts the investors.

Examples

Example 1: Given below are few details of M/S XYZ Ltd., use them an calculate the Dividend Payout Ratio for M/S XYZ Ltd.
Particulars Amount (in Rs.)
Equity Share Capital @ Rs 10.00 each 5000000.00
Net Profit 4000000.00
Rate of Dividend 15%
  • Solution:
  • Number of Equity Shares = 5000000 / 10 =500000
  • Earnings Per Share = Net Profit / Number of Shares = 4000000 / 500000 = 8
  • Dividend Per Share = 15 % of Rs. 10 = Rs. 1.5
  • Dividend Payout Ratio = Dividend Per Share / Earnings Per Share = 1.5 / 8 = 3/16
  • Hence, Dividend Payout Ratio = 3/16 or 0.1875 or 18.75%
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