The dividend payout ratio is one of the Market value ratios this shows the percentage of earnings paid to shareholders in dividends and how well earnings support the dividend payments. Big companies tend to have a higher payout ratio compared to companies in the growth stage. This is because growth companies can provide a higher return on investment by using the cash to invest in the growth of the company. Instead of distributing the cash as dividend.
This ratio can be compared to the industry average or to other companies to evaluate potential investments.
Formula for Dividend Payout Ratio
\[Dividend\,payout\,ratio = \frac{{Annual\,dividend\,per\,share}}{{Earnings\,per\,share}}\]
Example
Reliance Industries has a dividend per share in the amount of Rs.5.00 and earnings per share in the amount of Rs.15. This gives a dividend payout ratio of 33.33%, which means that Reliance Industries paid 33.33% of its net income to its shareholders in the form of dividend.
Dividend payout ratio can also be calculated by dividing dividends with net income.