What is the average dividend payout percentage

What is a dividend payout ratio?


There is one way you can easily see if your money is working for you. The magic word is: Dividend payout ratio! Do not be put off by this nonsense. Because we will now explain to you in peace how you can calculate the dividend payout ratio.

What exactly is a dividend payout ratio?

The dividend payout ratio is the proportion of the profit that a company pays out to its shareholders in the form of dividends.
But why doesn't a company just pass all of its profits on to its shareholders?

Well, as nice as that would be: the company needs the money, for example, to repay debts or to develop new products. However, there are certainly companies that pass all the profits on to their loyal shareholders. So. And what should you think of it now? Is it good if a company pays out all of its profits or is it better if it put it all back into the company? Before we answer this question, we first have to find out how to calculate this word monster.

Also important here: There is also a difference between the dividend yield and the dividend payout ratio. Sounds similar, but it's not the same.

Dividend yield and dividend payout ratio

The dividend yield tells you what the ratio of the dividend paid out is compared to the company's current market price. In other words, the dividend yield tells you how much cash you get back for every euro you invest. The dividend payout ratio describes the ratio of how much the company pays out to shareholders versus what it keeps for itself. Both values ​​give you important information for your investments.

How can I calculate the dividend payout ratio?

The formula is:

Dividend payout ratio = annual dividend per share divided by earnings per share

Let's do the math. The apple company has made $ 1.20, $ 1.10, $ 1.25, and $ 1.15 per share for the past four quarters, or $ 4.70 a year. Then, let's further assume that the apple company pays its shareholders a dividend of $ 3.10 per share.

Calculator out: We divide the annual dividend of $ 3.10 by earnings per share ($ 4.70), and that's around 65%. And what does this 65% tell me now?

It means that the apple company will pay out 65% of its profits as dividends that year. The company keeps the remaining 35% for itself, either to throw one or the other party or just for more growth and development.

Then how do I know if a quota is good or bad?

Good question. It depends on how long the company has been around. A start-up may have a low rate or even zero because it pumps all of its profits back into the company - to grow, develop new products or buy out the competition. An established corporation, on the other hand, can hardly avoid allowing its shareholders to participate in the profits. Otherwise they would be pretty disappointed.

However, if the rate is over 100%, this can be an alarm signal. Because that means the company gives shareholders more money than it earned. Not so good. Sooner or later it has to reduce the amount of the dividend or even bring it down to zero until it makes enough profit again.

And that, in turn, could bring the price to its knees because many investors think: Well, then I'd rather bring my money where I can get something in return.

Disclaimer: All views, opinions, and analysis in the articles are those of the author and do not represent the views of BUX. Neither BUX nor the author provide financial advice, and the articles should not be construed as advice.