A Dividend Payout Ratio Example can Help Figure out a Company’s Financial Viability

The dividend payout ratio is an indicator of the amount of earnings a company is using. When most of the funds are being funneled back into the company for growth, it means that the company is in a stronger financial position in order to increase future earnings. However, a higher payout ratio can be a larger profit for the investor over the short term. A dividend payout ratio example shows how much of the investment money is being used to increase a company’s earning potential.

The Formula for Determining Dividend Payout Ratio

The dividend payout ratio is determined by dividing the dividends per equity share by the earnings per equity share. They can also be looked at by the retained earnings ratio. This is determined by dividing the retained earning per equity share by the earning per equity share. These formulas help investors find companies that have a proper mix of investor profits with long term growth and capital investment. This gives them a dividend payout ratio example they can use to predict company sustainability.

An Example of Determining Dividend Payout Ratio

A dividend payout ratio example for a company that has a net profit of $100,000 would need the taxation information, the preference dividend, the number of equity shares and the dividend per equity share. For example, if the company had a $50,000 provision for taxation, a $20,000 preference dividend, 30,000 shares and a dividend per equity share of $4, the payout ratio would be ($4/$1) x 100. This gives a payout ratio of 40 percent. The retained earnings ratio could then be calculated also.

The Differences in Payout Ratios

The payout ratio will be different depending on how much money the company earns. The dividend payout ratio example for a company that offers $10 million in dividends each year will be different for Company A that earns $20 million compared to Company B that earns $50 million a year. Company A would be offering a 50 percent dividend return, while company B would be offering a 20 percent.

Why Does Dividend Payout Ratio Matter?

Some investors prefer long-term slow growth and want a company to reinvest earnings back into the business to provide continued growth. Other investors are looking for a cash payoff each quarter since dividends have a tax advantaged status for now. These calculations also determine if an investment is safe or higher risk. The dividend payout ratio is also an indicator of how willing a company is to pay its shareholders. For example, utility companies and telecoms are good bets for shareholders looking for a high payout ratio return on their investment.

A dividend payout ratio example can help a potential investor find the best companies to invest in. However, dividend payout ratios can be impacted by numerous factors. Different accounting methods may result in different earnings per share figures. Additionally, business in different stages of growth will have different payout ratios.