3 Ways To Calculate The Dividend Payout Ratio

For example, let’s say that Jim’s Light Bulbs, a new company, earned $200,000 in its first year of business, but it had to spend $50,000 on the expenses mentioned above. In this case, the net income for Jim’s Light Bulbs would be 200,000 - 50,000 = $150,000.

Let’s say that Jim’s Light Bulbs, being a relatively young company, decided to re-invest most of its net income by expanding its production capacity and only paid out $3,750 per quarter in dividends. In this case, we’ll use 4 times 3,750 = $15,000 as our amount of dividends paid in the first year of business.

For Jim’s Light Bulbs, we can find the dividend payout ratio by dividing 15,000 by 150,000, which is 0. 10 (or 10%). This means that Jim’s Light Bulbs paid out 10% of its earnings to its investors and invested the rest (90%) back into the company.

Let’s look at another example. Rita’s Rugs, an old, established company, doesn’t have much room to grow in the current market, so rather than use its earnings to expand, it pays its investors well. Let’s say that in Q1, Rita’s Rugs paid $1 per share in dividends. In Q2, it paid $0. 75. In Q3, it paid $1. 50, and in Q4, it paid $1. 75. If we want to find the dividend payout ratio for the whole year, we’d add 1 + 0. 75 + 1. 50 + 1. 75 = $4. 00 per share as our DPS value.

Let’s say that Rita’s Rugs has 100,000 shares of stock owned by investors and that it earned $800,000 in the last year of business. In this case, its EPS would be 800,000/100,000 = $8 per share.

For Rita’s Rugs, the dividend payout ratio can be found by dividing 4 by 8, which is 0. 50 (or 50%). In other words, the company paid out half of its earnings in the form of dividends to its investors in the past year.

For example, if a company pays regular quarterly dividends totaling $1,000,000 over a year but also paid out one special $400,000 dividend to its investors after a financial windfall, we would ignore this special dividend in our payout ratio calculation. Assuming a net income of $3,000,000, the dividend payout ratio for this company is (1,400,000 - 400,000)/3,000,000 = 0. 334 (or 33. 4%).

There are exceptions to this trend. Established companies with high potential for future growth can sometimes get away with offering payout ratios over 100%. For instance, in 2011 AT&T paid about $1. 75 in dividends per share and only earned about $0. 77 per share. That was a payout ratio of over 200%. However, because the company’s estimated earnings per share in 2012 and 2013 were both well over $2 per share, the short-term inability to sustain its dividend payouts did not impact the company’s long-term financial outlook.