# Dividend payout ratio

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Dividend payout ratio is the fraction of net income a firm pays to its stockholders in dividends:

$\mbox{Dividend payout ratio}=\frac{\mbox{Dividends}}{\mbox{Net Income for the same period}}$

The part of the earnings not paid to investors is left for investment to provide for future earnings growth. Investors seeking high current income and limited capital growth prefer companies with high Dividend payout ratio. However investors seeking capital growth may prefer lower payout ratio because capital gains are taxed at a lower rate. High growth firms in early life generally have low or zero payout ratios. As they mature, they tend to return more of the earnings back to investors. Note that dividend payout ratio is calculated as DPS/EPS.

According to Financial Accounting by Walter T. Harrison, the calculation for the payout ratio is as follows:

Payout Ratio = (Dividends - Preferred Stock Dividends)/Net Income

The dividend yield is given by earnings yield times DPR: $\begin{array}{lcl} \mbox{Current Dividend Yield} & = & \frac{\mbox{Most Recent Full-Year Dividend}}{\mbox{Current Share Price}} \\ & = & \frac{\mbox{Dividend payout ratio}\times \mbox{Most Recent Full-Year earnings per share}}{\mbox{Current Share Price}} \\ \end{array}$

Conversely, the P/E ratio is the Price/Dividend ratio times the DPR.

## Impact of buybacks

Some companies chose stock buybacks as an alternative to dividends, in such cases this ratio becomes less meaningful. One way to adapt it using an augmented payout ratio:[1]

Augmented Payout Ratio = (Dividends + Buybacks)/ Net Income for the same period

## Historic Data

The data for S&P 500 is taken from.[2] The payout rate has gradually declined from 90% of operating earnings in 1940s to about 30% in recent years.

DecadePrice %
Change
Dividend
Contribution
Total
Return
Dividends as %
of Total Return
Average
Payout
1930s-41.90%56.00%14.10%N/A90.10%
1940s34.8100.3135.174.20%59.4
1950s256.7180436.741.254.6
1960s53.754.2107.950.256
1970s17.259.176.377.545.5
1980s227.4143.1370.538.648.6
1990s315.795.5411.223.247.6
2000s-158.6-6.4N/A32.3
Average106.10%87.10%193.20%50.80%54.30%

For smaller, growth companies, the average payout ratio can be as low as 10%.[3]