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.
$$Dividend\quad Payout\quad Ratio=$$$$\frac { Dividend\quad per\quad Share }{ Earnings\quad per\quad Share } $$
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%