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Dividend Payout Ratio Calculation

Financial experts' opinions on the importance of dividend payout are mixed. Some say it is an important measurement, whereas others strongly disagree.

The meaning behind Dividend payout ratio (DPR) is the money that is paid out in the form of dividends by the company to its shareholders.

Dividend Payout Ratio Formula

In order to make the appropriate calculations for the dividend payout ratio you should use the following formula:

DPR = Dividends per Share / Earnings per Share

Consider the following example. Company ABC has paid its shareholders \$1 per share in the form of annual dividends. Its earnings per share were \$2.5. So, its dividend payout ratio will be 40%.

Now that you have got some percentage, you probably wonder how exactly you should interpret it and whether it is good for the company.

Low dividend paying or the absence of such may be explained by the fact that the company has decided to grow and as a result it needs money to fund its growth. These funds can come from dividends and the company may decide to retain some.

On the other hand, companies that pay high dividends to their shareholders may do this since they have reached their maturity and there is no room for growth. As a result, the most efficient and effective use of the profits will be to return them to the company's shareholders.

Therefore, when you interpret a DPR you should do it in light of the company itself and the industry in which it operates.

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