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All trading basics

Dividend Payout Ratio

Dividend Payout Ratio = Yearly Dividend per Share ÷ Earnings per Share

Indicates the proportion of earnings that are used to pay dividends to shareholders.

Things to remember

  • A reduction in dividends paid is looked poorly upon by investors, and the stock price usually depreciates as investors seek other dividend paying stocks.
  • A stable dividend payout ratio indicates a solid dividend policy by the company's board of directors.
Income Statement
Consolidated income statement for Cory’s Tequila Co. for 1998 and 1999

Dividend Payout Analysis:

Cory's Tequila Co. dividend payout ratio is zero, in other words they do not pay a dividend to its shareholders. This is the case for most high growth firms, their profits are better spent by reinvesting in the firms activities rather than as a cash payout to shareholders. In fact a majority of corporations have elected to pay out less of their earnings as dividends, perhaps because corporate rates of return on reinvested capital are higher these days, but it could also be that dividends are doubly taxed in some jurisdictions.