Dividend payout ratio, also known as Dividend Payout Ratio in English, is a financial indicator that measures the proportion of dividends paid to shareholders by a listed company to its net income. The dividend payout ratio can be calculated by dividing total annual dividends during the financial year by total annual net income, or by dividing dividends per share during the financial year by earnings per share. The value of the dividend payout ratio represents the dividend income that shareholders can receive from the company's earnings. For investors, the higher the dividend yield, the better. But in reality, an excessively high dividend payout ratio means that the company faces higher financial risks. Once the company's operating capabilities fluctuate, it may face high operating costs. In specific calculations, different analysts will use different values. For example, some analysts will use year-end dividends, while some analysts will choose to use diluted dividends. Therefore, there will be a certain error range in the specific evaluation. Investors still need to combine other more financial data to make a more accurate judgment on the company's investment value. Net income (Net Income) and earnings per share (EPS) can be found on the income statement of a company's financial report. Total dividends (Dividends) and Dividends Per Share (Dividends Per Share) can be found on the statement of shareholders' equity in a company's financial report. How is Apple's dividend payout ratio calculated? This chapter will perform example calculations by using Apple's 10-K financial report released in September 2021: The income statement and shareholders' equity statement in AAPL's financial report are as follows: Income statement: Statement of Shareholders’ Equity: As can be seen from the data sheet, Apple's mid-2021 financial year: Dividends $14,431 M Net Income $94,680 M Dividends Per Share $0.85 Basic EPS $5.67 Diluted EPS $5.61 So: Dividend payout ratio = total dividends / net income Dividend Payout Ratio = Dividends / Net Income = $14,431 M / $94,680 M = 15.24% Dividend payout ratio = dividends per share / earnings per share Dividend Payout Ratio = Dividends Per Share / Basic EPS = $0.85 / $5.67 = 14.99% Dividend payout ratio = dividends per share / outstanding earnings per share Dividend Payout Ratio = Dividends Per Share / Diluted EPS = $0.85 / $5.61 = 15.15% It can be seen from the calculation results that Apple's dividend payout ratio in fiscal year 2021 is about 15%. The dividend payout ratio calculated using diluted earnings per share is closer to the dividend payout ratio calculated using total dividends and net income. What investment guidance does the dividend payout ratio have? The biggest role of the dividend payout ratio is to measure the amount of dividend income investors can receive after investing in a company: A higher dividend payout ratio means that investors can receive more income distribution from the company's earnings; A lower dividend payout ratio means that investors will have limited income from dividends during the investment process. Another use of the dividend payout ratio is to assess a company's stage of development: When a company is in the development stage, its dividend payout ratio is usually lower because companies at this stage need to reinvest a large amount of operating earnings and expand the company's size. Investors in such companies usually gain more from the stock price and limited gains from the dividends. Companies that are in a mature stage or have limited room for growth usually have a higher dividend payout ratio, because such companies do not have much room to reinvest operating earnings. Investors in such companies usually gain less value-added income from the stock price and more income from dividends.
However, a very high dividend payout ratio is not a good thing for either the company or investors. A high dividend payout ratio means that the company has high operating costs. Once the company's operating capabilities fluctuate, it is very likely to reduce costs by reducing dividends. However, lowering dividends will bring negative investment sentiment to investors, which can easily cause the stock price to fall, which may ultimately lead to a reduction in investors' income from dividends and a similarly reduced return from the stock price. What are the limitations of using the dividend payout ratio? There is no recognized optimal value for the dividend payout ratio, because the dividend payout ratio will vary greatly in different industries. For example, the public utility industry, consumer necessities industry, etc., can provide higher dividend payout ratios because of their high yields and reliable cash flow, while technology industries, etc., need to use their earnings for continuous innovation and growth, so their dividend payout ratios are low. Therefore, when using dividend payout ratio to measure different companies, attention needs to be paid to evaluating companies in the same industry. In addition, when calculating the dividend payout ratio, different analysts will use different values, such as earnings per share. Some analysts will use the ending earnings per share, while some analysts will use diluted earnings per share to calculate. Therefore, if you want to obtain evaluation results that are more in line with your own investment needs, you need to combine more other financial indicators to conduct a more comprehensive and accurate investment value analysis of the company. What is the difference between dividend payout ratio and dividend yield? Dividend yield, also known as Dividend Yield in English. The dividend yield is calculated by dividing the company's annual dividend per share by the share price, which is: Dividend rate = annual dividend per share / share price per share Dividend Yield = Annual Dividends Per Share / Price Per Share dividend payout ratio dividend yield Calculation method Dividends per share/Earnings per share Dividend per share / share price per share numerical indication Dividend income that shareholders receive from corporate earnings; the ability of shareholders to generate returns from the company’s share price; numerical comparison The higher the value, the higher the return shareholders receive from the company's earnings; However, an excessively high dividend payout ratio indicates that the company uses most of its earnings for dividend payments rather than company expansion, etc.; The higher the value, the more dividend returns investors can get from the company’s stock price; The higher the company's share price, the lower the dividend yield for shareholders; Purpose Dividend payout ratio is used to measure a company's development progress and the return on investment. Determine the value of investment by dividend rate and the stock price range for investment More company value analysis What are minority interests? How to handle the profits of subsidiaries? What is Shareholders’ Equity? Shareholders’ Equity What is the Price to Cash Ratio (P/CF)? How to calculate? What is Operating Expense OpEx? Operating Expenses What is Cost of Goods Sold (COGS)? How to calculate? What is company profit? Gross profit, operating profit, net profit What is enterprise value multiple? Enterprise Multiple What are preferred shares? Preferred Stock What is operating leverage? Degree of Operating Leverage What is debt service ratio? Debt Service Coverage Ratio