Question

How do companies determine the amount to pay as a dividend? What is dividend payout ratio?

Answer 1

Answer

The dividend payout ratio is the ratio of the total amount of dividends paid out to shareholders relative to the net income of the company. It is the percentage of earnings paid to shareholders in dividends. The amount that is not paid out to shareholders is retained by the company to pay off debt or to reinvest in core operations.

The dividend payout ratio can be calculated as the yearly dividend per share over the earnings per share, or equivalently, the dividends divided by net income (as shown below):

Yearly dividend per share / earnings per share

                          or

           Dividends / net income