How to Calculate Dividend Payout Ratio

Dividend payout ratio measures the percentage of earnings paid to shareholders in the form of dividends. It is calculated by dividing annual dividend per share by earning per share. A lower ratio indicates that the company is primarily focused on retaining its earnings rather than paying dividends to shareholders.

Learn how to calculate dividend payout ratio with the following examples:

Example 1:
Info Ltd has the following data:
Net profit before tax $500,000
Corporation tax $50,000
Dividends proposed $45,000

Therefore,
Net profit after tax = Net profit before tax - Corporation tax = 500,000 - 50,000 = $450,000
Dividend Payout Ratio = (Dividends proposed / Earnings available for dividends) * 100% = (45,000 / 450,000) * 100% = 10%

Example 2:
Net Profit after tax $100,000
Preference dividend $5,000
No. of equity shares 190,000
Dividend per equity share $0.10

Solution:
Earnings per Share = (Net Profit after tax - Preference dividend) / No. of equity shares = (100,000 - 5,000) / 190,000 = $0.50
Dividend Payout Ratio = ($0.10 / $0.50) * 100% = 20%
This means that 20% of this companies earnings is going towards paying a dividend.

* Next: How to Calculate Interest Coverage Ratio