Dividend refers to a reward, cash or otherwise, that a company gives to its shareholders.
The dividend payout ratio is the ratio of the total amount of dividends paid out to shareholders relative to the net income of the company.
A company that is likely to distribute roughly half of its earnings as dividends means that the company is well established and a leader in its industry.
Formula to calculate dividend payout ratio.
Company A reported a net income of $50,000 for the year. In the same time period, it declared and issued $10,000 of dividends to its shareholders. Calculate the dividend payout ratio.
Therefore, the dividend payout ratio is 20%.