Dividend Payout Ratio

The Dividend Payout Ratio measures what portion of a company’s earnings is actually paid out to shareholders as dividends. It is the direct link between the profit earned per share and the cash distributed per share.

The formula is:

Dividend Payout Ratio = Dividend per share / Earnings per share

Dividend per share is the total dividend declared for equity shareholders divided by the number of equity shares. Earnings per share is the net profit after tax and preference dividend divided by the number of equity shares.

This ratio reveals two things about the company. First, it shows the dividend policy — how much of the profit the management chooses to distribute versus retain. A high ratio (close to 1 or above 100%) means the company pays out most of its earnings; a low ratio means it keeps most earnings inside the business. Second, it indicates the growth in owner’s equity — the portion of profit not paid out (the retention ratio) is added to reserves and surplus, increasing shareholders’ funds.