The dividend is known as the reward offered by a listed company to its shareholders. If a company makes a profit at the end of a fiscal, it can pay a percentage of the profit to the shareholders as dividends. However, this is not a mandatory option for the companies. Here, the portion of the profit that the company's board decides to pay out to its shareholders, is measured with the payout ratio.
What Is Dividend Payout Ratio?
The Dividend Payout Ratio is known as the ratio of the total amount of dividends paid out to the company's shareholders, that is relative to the net income of the company. The Dividend Payout Ratio is the percentage of earnings paid to shareholders through dividends.
To measure the Dividend Payout Ratio, one needs to divide the Dividends Paid by the company's Net Income. One can measure the dividend payout ratio as the yearly dividend per share divided by the earnings per share (EPS). Equivalently, the dividends are divided by net income.
Hence, through the dividend payout ratio one can get to know how much money a listed company is returning to the shareholders, versus how much the company is keeping to itself for reinvesting in different segments, or to pay off debt. So, a 20% Dividend Payout Ratio means that the company is paying 20% of its earnings to the shareholders.
By paying dividends, a company can attract new investors to improve its liquidity.