Dividend Pay-Out Ratio Homework Help, Tutoring
Dividend Pay-Out Ratio Assignment Help, Dividend Pay-Out Ratio Tutor Help:
Dividend Pay-Out Ratio
This is the ratio of dividend per share (DPS) to Earnings per share (EPS). It indicates
what percentage of total earnings is paid to shareholders. It is computed as:
Dividend per share
Earnings per share
Earnings per share
OR
Dividends
Net Income
Net Income
The percentage of the earnings that is not paid out (1 - Dividend pay-out) is retained
for the firms future needs. There is no guideline as to what percentage of earnings
should be declared as dividend and it varies according to firm's fund requirements
to support its operations. If the firm is in need of funds, then it may cut the
dividends in relation to earnings and on the other hand if the firm finds that it
lacks opportunities to use the profits generated, it might increase the dividends.
Firms that experience high growth rates tend to have a low pay-out ratio as compared
to the ones that have low growth expectations. High pay-out ratio means that the
firm will have less profit to plough back into the business for future growth. But
in both the cases, consistency of dividend payment is important to the shareholders.
Example:
If a company has earnings per share of $3 and pays out $2 in dividends, its dividend
pay-out ratio would be 67%
$2
$3
67%
$2
$3
67%
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