Dividend Payout Ratio Formula | Calculation (with Examples) - YouTube

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clicking the bell ican friends today we have going to learn a concept which is known as dividend

payout ratio formula at the very first end we are going to see the formula

dividend payout ratio formula shows something like this you will have

dividends which have been paid by the company divided by the net ratio so

let's understand this formula so that will have a clear understanding

regarding this particular formula now we are discussing dividend payout ratio

formula over here when a company you can say makes a profit at the end of the

year they may share a portion of their profit with the stock holders we call it

dividend and by using the dividend payout ratio formula we find out the or

percentage of the dividend paid to the shareholders basically so basically this

has been paid out of the net profit of the company now the formula again it

goes something like this dividend payout ratio formula is equal

to your dividend divided by net income let's understand this with the help of

an example so that we will have an understanding regarding the same there's

a company called Danny Inc has been in the business for last few years recently

you know it had started paying its shareholders dividend and it has paid

dividend of let's say $1,40,000 the net income of the

company is let's say $4,20,000 in the last year and

Danny Inc has decided to keep the retained earnings retained earnings

standing at 66.67 but this is

the retained earnings using the two methods and find out based on this

the dividend ratio for the last year for Danny Inc now as mentioned in the whole

example if we discussed will use two methods to calculate this ratio first

we'll use the first ratio this is the first ratio that we are going to go for

now we know that the dividend that has been paid in the last year the dividend

that has been paid in the last year has been 1,40,000 right and

the net profit has been $4,20,000 so using the first

ratio of the dividend payout ratio the net income which shows us as

$4,20,000 using the first ratio of the dividend payout formula we

get something like this the dividend ratio is equal to dividend divided by

the net income so let's divide dividend divided by the net income so we get 0.33

as the answer for the same which is 33.3% right

so now we'll use the second ratio now we know that 66.67% was

kept as retained earning because this has been paid right if we do if we do 1

- 33% will get 67% so 66.7% was kept as

a retained earning that means the retention ratio is standing at 66.67% so

now using the second method we get dividend payout ratio is equal to 1

minus the retention ratio 66.67% which gives us 33.33%

so these are the two methods by which you can calculate now let's apply

dividend payout ratio calculation I'll show you a practical example to

understand dividend ratio in a much better fashion now this is the data for

the apples dividend payout ratio a couple of

details regarding dividend net income and the payout ratio what I can see over here

right from 2012 to 2016 from 2012 to 2013 there has been a major rise and

then it is significantly following the same with one reduction in 2015 and

getting back in 2016 so you can say in just one year there has been massive

increase in till 2011 Apple didn't pay any dividend given into the investor

because they believed that if they would reinvest the earnings you'd be able to

generate better returns for the investor which they did eventually so this is

this case scenario for Apple and look how they are changing this strategy by

plying back their money into their business and reinvesting research

purpose for expanding the infrastructure and so on and so forth now after

understanding the formula with the help of real-life example let's understand

the explanation part of the dividend payout ratio now for a company sharing

the profit is afterthought first they they decide how much they will reinvest

into the company so that the business can grow bigger and the business can

multiply the shareholders money instead of just sharing it so that's why the

dividend payout ratio formula is is vital for any company it tells about it

tells how much a company is paying dividend to its shareholders and how

much the company is reinvesting into itself which we call as the retained

earnings right so sometimes you know company does not pay attention or pay

pay anything to their shareholders because they feel that they need to

reinvest their profits of the company so that the company grow

faster no since the net profit of the company are only used over here what we

use as the net profit of the company we can conclude that the net income is

equal to your retained earnings plus any dividend that has been paid right so

this is going to be the formula now this is the graph of Amazon if you see Google

alphabet box a Hathaway and Colgate now in case of Amazon Google in Berkshire

Hathaway's 0% dividend payout there's no dividend they're paying it but in case

of Colgate they are paying 61.78% now what we know that Colgate is

really paying high dividend 61.67% that is in

2016 and 2017 and rest three are just 0% they haven't

paid a penny to the shareholders via dividends now if an investor looks at

the income statement of the company he or she would be able to find the net

income for the year and in the balance sheet they can find the retained

earnings of what that would be found so if you need to know how the company has

calculated the retained earnings and also the dividends you can check the

footnotes under the financial statement now what is exactly the use I want to

understand what is exactly the use of this dividend payout ratio see

understanding the equation between the region earnings and the dividend payment

will help an investor comprehend the short term and the dividend payment will

help the investor comprehend the short term and the long term goal of the

company now since many companies also pay 100% dividend we can also use an

alternative formula for calculating the dividend payout ratio now the

alternative method will be dividend payout ratio basically is equal to one

minus your retention ratio the retention ratio is basically the person is at the

profit the company keeps for Reinvestment now looking at the past

dividend payout ratio formula the investor gets in sure about how much

they may receive in the near future so the dividend payment dividend payout

ratio is really very important because it it is a great measure for driving the

valuation of the company where Gordon's growth model has been used or for the

calculation of the market price for shares so it is a very big driver so

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