# How the Dividend Payout Ratio Works

### Reviewed by Subject Matter Experts

Updated on June 01, 2023

## Dividend Payout Ratio: Definition

The dividend payout ratio shows what portion of available profits is distributed away to equity shareholders in the form of dividends.

Hence, the dividend payout ratio also indicates what portion of profits is being reinvested in the business.

## Formula For Dividend Payout Ratio

The dividend payout ratio is the ratio of total dividends to net profit after tax. The formula is given below.

To express the dividend payout ratio as a percentage, use the following formula:

## Example

The net profit after tax of a trading company is \$240,000. During the year, the company declared and paid a dividend of \$75,000. What is the company's dividend payout ratio?

Dividend payout ratio = (\$75,000/\$240,000) × 100

= 0.3125 (or 31.25%)

The company paid 31.25% of its profit to shareholders in the form of dividends and retained 68.75% profit in the business for growth.

A company in its initial stages of development might find it necessary to retain a larger part of the profit in the business to help it grow.

By contrast, a company with adequate liquid resources may distribute a larger portion of its profits to shareholders.

Local rules and regulations, particularly those imposed on listed companies by stock exchanges, also require companies to distribute adequate dividends to keep the interest of the shareholders alive.

## Dividend Payout Ratio

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