Dividend payout ratio

Dividend payout ratio is the fraction of net income a firm pays to its stockholders in dividends:

$\mbox{Dividend payout ratio}=\frac{\mbox{Dividends}}{\mbox{Net Income for the same period}}$

The part of the earnings not paid to investors is left for investment to provide for future earnings growth. Investors seeking high current income and limited capital growth prefer companies with high Dividend payout ratio. However investors seeking capital growth may prefer lower payout ratio because capital gains are taxed at a lower rate. High growth firms in early life generally have low or zero payout ratios. As they mature, they tend to return more of the earnings back to investors. Note that dividend payout ratio is calculated as EPS/DPS.

According to Financial Accounting by Walter T. Harrison, the calculation for the payout ratio is as follows:

Payout Ratio = (Dividends - Preferred Stock Dividends)/Net Income

The dividend yield is given by earnings yield times DPR: $\begin{array}{lcl} \mbox{Current Dividend Yield} & = & \frac{\mbox{Most Recent Full-Year Dividend}}{\mbox{Current Share Price}} \\ & = & \frac{\mbox{Dividend payout ratio}\times \mbox{Most Recent Full-Year earnings per share}}{\mbox{Current Share Price}} \\ \end{array}$

Conversely, the P/E ratio is the Price/Dividend ratio times the DPR.

Impact of buybacks

Some companies chose stock buybacks as an alternative to dividends, in such cases this ratio becomes less meaningful. One way to adapt it using an augmented payout ratio^[1]:

Augmented Payout Ratio = (Dividends + Buybacks)/ Net Income for the same period

Historic Data

The data for S&P 500 is taken from ^[2]. The payout rate has gradually declined from 90% of operating earnings in 1940s to about 30% in recent years.

Decade	Price %	Dividend	Total	Dividends as %	Average
	Change	Contribution	Return	of Total Return	Payout
1930s	-41.90%	56.00%	14.10%	N/A	90.10%
1940s	34.8	100.3	135.1	74.20%	59.4
1950s	256.7	180	436.7	41.2	54.6
1960s	53.7	54.2	107.9	50.2	56
1970s	17.2	59.1	76.3	77.5	45.5
1980s	227.4	143.1	370.5	38.6	48.6
1990s	315.7	95.5	411.2	23.2	47.6
2000s	-15	8.6	-6.4	N/A	32.3
Average	106.10%	87.10%	193.20%	50.80%	54.30%

For smaller growth companies, the average payout ratio can be as low as 10%^[3]

See also

• Dividend
• Dividend yield
• Liquidating dividend
• Special dividend
• Sustainable growth rate
• Retention ratio

References

1. ^ http://pages.stern.nyu.edu/~adamodar/ Financial Ratios and Measures
2. ^ http://www.eatonvance.com/mutual_funds/dividend_story.php The Dividend Story
3. ^ http://www.barra.com/Research/Fundamentals.aspx S&P/Barra Indexes -- Fundamentals