How to Calculate Dividend Payout

Are you trying to evaluate current or prospective investments? How can you tell if a company is paying a healthy dividend? Answering these questions and understanding the details of your dividend payments can be done by calculating the dividend payout ratio. 

Dividend payout is a simple calculation that shows how much income a company is returning to its investors in the form of dividends. Knowing what percentage a company is reinvesting and paying out gives you insights into operational goals and the long-term viability of your investment. 

In this article, we’ll explore everything you need to know about how to calculate dividend payout, including its importance, required calculation steps, and how to interpret a few real-life examples. 

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Why the Dividend Payout Ratio is Important 

Dividend payout ratio is important for a variety of reasons. For one, it gives you information about a company’s financial health. A company with a dividend payout ratio that is too high or too low can indicate operational issues. 

Additionally, the dividend payout ratio assesses a company’s priorities. For example, are they prioritizing growth through reinvestment or shareholder returns with high dividends? Growing companies might choose to have a low payout ratio, while mature companies tend to have a higher payout ratio. 

With this information in mind, you can make more informed investment decisions based on your goals. For example, if you require a minimum return on investment, a company with a history of inconsistent or low payouts wouldn’t be an attractive option. 

Also Read: 5 Best Dividend Stocks to Own Right Now

Dividend Payout Ratio Formula

The dividend payout formula is relatively straightforward, only requiring two numbers. 

Dividend Payout Ratio = Total Dividends / Net Income

Let’s look at an example. ABC Inc. had a good year, generating $1,000,000 in net income. As a result, they decide to return $150,000 to investors. Dividing $150,000 by $1,000,000 gives us a payout ratio of 15%. 

The dividend payout ratio can also be calculated by looking at the dividends per share using the following formula: 

Per Share Dividend Payout Ratio = Dividends per Share / Earnings per Share (EPS)

Earnings per share is found by subtracting preferred dividends from a company’s net income and then dividing that amount by the average common shares outstanding. Let’s say that ABC Inc. has $500,000 of net income, no preferred stock payments, and 25,000 shareholders. During the year, they paid out $2 to each shareholder. Using the above formula, we divide $2 by the EPS, which is found by taking $500,000 divided by 25,000. This results in a per share dividend payout ratio of 10%.

Steps to Calculate the Dividend Payout

Let’s look at a real-world example using Apple’s 2023 financial statement package. The first figure we need to find is net income. This is found on the income statement, also known as the consolidated statements of operation. Below is a snippet of Apple’s operations statement: 

For the fiscal year 2023, net income is $96,995, in millions, or $96,995,000,000. Now, let’s find the dividends paid during the year. Dividends can be found on the statement of shareholders’ equity or the cash flow statement, both of which are included in a standard financial statement package. 

The cash flow statement tells us the amount of cash actually used to pay dividends during the year. Looking at the column under financing activities on September 30, 2023, we see that $15,025,000,000 was paid. 

Dividing the dividends of $15,025,000,000 by the net income of $96,995,000,000 gives us a dividend payout ratio of 15.49%. If we wanted to calculate the per share dividend payout ratio, the earnings per share amounts are located on the statement of operations. The number of shares outstanding is also found in that document. 

Comparing Dividend Payout Ratio to Other Metrics

The dividend payout ratio is commonly used in conjunction with other metrics. Here are a couple:

Dividend Payout Ratio vs. Dividend Yield

The first metric investors calculate alongside the dividend payout ratio is the dividend yield. This calculation measures how much a company pays out relative to its stock price. For example, if a company is trading at $10 per share and the earnings per share is $2, the company would have a dividend yield of 20%.

Dividend Payout Ratio vs. Retention Ratio

The second metric used with the dividend payout ratio is the retention ratio. This formula is the opposite of dividend payout, showing how much of a company’s profits are reinvested. To find this ratio, you subtract one from your calculated dividend payout ratio. For example, if a company has a dividend payout ratio of 0.35 or 35%, the retention ratio would be 65%.

Factors Affecting Dividend Payout Ratios

Dividend payout ratios can vary by industry, stage of growth, and company financial health. Each of these factors influences a company’s payout decisions. Let’s break these three items down into more detail, showing how they might impact dividend payout ratios. 

• Industry – Some industries, like the tech and communication services sectors, are known for low payout ratios. Shareholders receive a return through share appreciation rather than dividends. 
• Growth Phase – Startups and new companies are more likely to reinvest profits for growth rather than issue a high payout ratio. On the contrary, established companies might be looking to maintain current levels, resulting in the ability to pay more dividends. 
• Financial Health – Companies that are struggling or preparing for an upcoming event or economic downturn may be more bearish about issuing dividends. Instead of depleting cash levels, they will lower dividends if funds are needed. 

When evaluating a company’s payout ratio, keep these factors in mind. A high or low payout ratio isn’t necessarily bad when considering the big picture and a company’s industry, growth stage, and financial health. 

Real-World Examples

It can be hard to decipher whether a company’s payout ratio is good or bad. Let’s look at the dividend payout ratios of a few well-known companies and what they tell us. 

Arbor Realty Trust (ABR) – 118.06% 

Arbor Realty Trust has a payout ratio above 100%, meaning it pays out more dividends than it earns. This is common for real estate investment trusts, as they are required to distribute at least 90% of earnings. Sources of excess cash might come from profits set aside in prior years and financing activities. 

Johnson & Johnson (JNJ) – 70.75%

Johnson & Johnson was founded in 1886 and is among the list of Dividend Aristocrats, meaning it has increased its dividend every year for the past 25 years. A 70.75% payout ratio is healthy for an established company that is consistently growing revenue and net income. 

Meta Platforms (META) – 4.85%

Contrasting JNJ is Meta, which has a dividend payout ratio of 4.85%. Many investors focusing solely on dividend payout might stray away from Meta; however, it’s important to look at the big picture. For one, Meta just started paying dividends in 2024, indicating that they are still working these payments into operations. The second factor to consider is share appreciation. Meta’s stock price has increased 217.68% over the past five years, partly making up for a low payout ratio. 

The Bottom Line

A dividend payout ratio is a beneficial calculation that gives you insights into how a company is reinvesting profits and paying shareholders. However, it isn’t the only factor that should be considered. Return on investment, revenue growth, and profitability must also be included in your decision. 

Frequently Asked Questions

What is a Good Dividend Payout Ratio?

Good dividend payouts are going to depend on several different factors, but a dividend payout ratio between 30% and 50% is considered good.

Can a Dividend Payout Ratio Be Negative?

If a company reports negative earnings but pays out a dividend to shareholders, it would have a negative dividend payout ratio.