Dividend payout ratio is the percentage of income that an organization distributes among its shareholders by way of dividend to the total income or profit earned by that organization.
The dividend payout ratio is referred by investors to evaluate the percentage of dividend they expect to earn by investing in the stocks of different companies.
How to use this Ratio for investing?
Investors who prefer to earn higher income with limited increase in the value of their capital, would obviously prefer to invest in the stock of a company which has a higher dividend payout ratio.
The amount that is left after paying the dividend is termed as retained earnings. Retained earnings is used towards repayment of debt, adding to the capital reserve of the company or maybe to reinvest in the company.
So people who want that the value of their capital appreciate considerably and does not need much of an income at present will definitely opt for the stock of a company which has a low payout ratio.
Generally start-up companies have a low dividend payout ratio. In some cases, like organizations of the segment REIT(Real Estate Investment Trust) are bound to maintain a dividend payout ratio if at least 90%, as the investors enjoy a tax exemption on the income earned.
Recommended Read :
- What are Financial Statements?
- What is a Balance Sheet?
- Financial Statement of a Company 6 Important Points
- What is a Financial Ratio?
- What is Meant By Financial Health of a Company?
- What are Company Earnings?
- What is Working Capital?
- Calculate Working Capital
- What is Earnings Per Share?
- What are Cash Reserves?
- What is Break Even Point of a Company?
- What are Current Liabilities?
- What are Long Term Liabilities?
- What is Debt to Equity Ratio?
- What is Dividend Payout Ratio?
- What is Dividend Yield?
- What is Meant By Liquidity of Funds?
