Technicals Stability Returns




Understanding Dividend Payout Ratio

The Dividend Payout Ratio (DPR) is the percentage of the company's earnings paid out to the shareholders in the form of dividends. It measures the relationship between the company Earnings Per Share (EPS) and Dividend Per Share (DPS).

The dividend Payout Ratio indicates how much the company's earnings are paid out as dividends to shareholders and how much the company retains its earnings for growth and expansion. The dividend payout ratio is also popularly known as the Payout Ratio.

The formula to derive Dividend Payout Ratio

Dividend Payout Ratio


Dividend Per Share (DPS) - It is the dividend paid to shareholders of the company on a per share basis and calculated by dividing the Total Dividend Paid by the Number of Share Outstandings.

Earnings Per Share (EPS) - EPS is a measure of the company's profits available for the shareholders on a per share basis and calculated by dividing the Net Income by Weighted Share Outstanding. EPS is found in the company's Income Statement.

Example of Dividend Payout Ratio: For the financial year, HDFC Bank limited reported Earnings Per Share (EPS) as Rs. 4983.63 and Dividend Per Share (DPS) as Rs. 56.44. The value as per the formula [Dividend Payout Ratio = Dividend Per Share (DPS) / Earnings Per Share (EPS) X 100] is calculated as (4983.63 / 56.44) = 82.29%.


Key Highlight
The Dividend Payout Ratio (DPR) measures the percentage of the company's net profit distributed to shareholders in the form of dividends. It is calculated by dividing Dividend Per Share (DPS) by Earnings Per Share (EPS).

The Dividend Payout Ratio is also popularly known as the Payout Ratio.

Well-established companies of a mature industry or cash flow generated companies are likely to give higher dividends than the smaller companies or the companies that are still in their growth phase.


While looking at the Dividend Payout Ratio, the following points should also take into consideration:
Higher Dividend Payout Ratio is considered good. It indicates that the company is giving high dividends to its shareholders.

A low dividend payout ratio does not necessarily mean that the company's performance is weak in generating net income. It can be due to the company's is reinvesting its earnings for growth and expansion.

The dividend Payout Ratio usually ranges from zero percent to a hundred percent.

Well-established companies of a mature industry or cash flow generated companies are likely to give higher dividends than the smaller companies or the companies that are still in their growth phase.

DPR is important from the perspective of both the company as well investors. Some companies keep a high dividend payout ratio to keep the investors interested, so investors get an insight into the maturity of the business.

Companies that are still growing or have less cash flow are likely to give less amount of dividends, or some do not pay dividends at all. It can be due to the unprofitability or reinvestment in operations for growth and expansion.


How to use Dividend Payout Ratio effectively
Growing companies that are not paying dividends or paying less dividends may pay high dividends in the future.

Consistent growth in the dividend payout ratio of the particular company over a period is more important than a high or low ratio.

Many investors look at DPR because it gives a clear picture of whether the company is paying out an equitable portion of net profit to shareholders or not.

Investors should look for a high Dividend Payout Ratio. But also should be conscious about the very high ratio. If the company's DPR is more than 100%, it indicates that the company is paying more money than its earnings to shareholders. It may affect later in the future like, the company may have to lower its dividends or stop completely.

While doing a comparative analysis of the companies, also checks their historical data to know the past performance of companies for better understanding. High DPR of the company's historical performance indicates that the company is financially healthy in generating revenues.

Analyzing the company's dividend payout ratio, we should always look at other financial ratios also like Retention Ratio, Return On Invested Capital (ROIC), Return On Capital Employed (ROCE), Return on Equity (ROE), etc.,




Range Indicator of Dividend Payout Ratio

Range Indicator Comments
40 to 50 Strong Bullish Extremely High Dividend Pay
35 to 40 Bullish High Dividend Pay
28 to 35 Mild Bullish Good Dividend Pay
20 to 28 Neutral Average Dividend Pay
12 to 20 Mild Bearish Low Dividend Pay
8 to 12 Bearish Very Low Dividend Pay
0 to 8 Strong Bearish Extremely Low Dividend Pay