Understanding Dividend Payout Ratio

Mature man sitting at desk checking receipts
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There are some metrics used in fundamental analysis that fall into what I call the ho-hum category.

The Dividend Payout Ratio (DPR) is one of those numbers. It almost seems like a measurement invented because it looked like it was important, but nobody can really agree on why.

The DPR (it usually doesnt even warrant a capitalized abbreviation) measures what a companys pays out to investors in the form of dividends.

You calculate the DPR by dividing the annual dividends per share by the Earnings Per Share.

DPR = Dividends Per Share / EPS

For example, if a company paid out $1 per share in annual dividends and had $3 in EPS, the DPR would be 33%. ($1 / $3 = 33%)

The real question is whether 33% is good or bad and that is subject to interpretation. Growing companies will typically retain more profits to fund growth and pay lower or no dividends.

Companies that pay higher dividends may be in mature industries where there is little room for growth and paying higher dividends is the best use of profits (utilities used to fall into this group, although in recent years many of them have been diversifying).

Either way, you must view the whole DPR issue in the context of the company and its industry. By itself, it tells you very little.

The articles in this series:

  1. Earnings per Share – EPS
  2. Price to Earnings Ratio – P/E
  1. Projected Earning Growth – PEG
  2. Price to Sales – P/S
  3. Price to Book – P/B
  4. Dividend Payout Ratio
  5. Dividend Yield
  6. Book Value
  7. Return on Equity

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