What is a Dividend Payout Ratio?
The dividend payout ratio is the ratio of dividends to net income, and represents the proportion of net income paid out to equity holders.
The dividend payout ratio formula can be stated as follows:
The calculation can be done on a per share basis by dividing each amount by the number of shares in issue.
Any net income not paid to equity holders is retained for investment in the business.
A high dividend payout ratio is good for short term investors as it implies a high proportion of the profit of the business is paid out to equity holders. However, a high dividend payout ratio leads to low re-investment of profits in the business which could result in low capital growth for both the business and investor. A long term investor might be prepared to accept a lower dividend payout ratio in return for higher re-investment of profits and higher capital growth.
For further information on see the Wikipedia definition.
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