# Dividend Payout Ratio

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## Determining whether a company is generating a sufficient level of cash flow. Explanation of Dividend Payout Ratio.

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The Dividend Payout Ratio is a model for Cash Flow Measurement, used by investors to determine whether a company is generating a sufficient level of cash flow to assure a continued stream of dividends to them. It is also a measurement of the amount of current net income, which is paid out in dividends, instead of the amount retained by the business.

### Dividend Payout Ratio calculation

The Dividend Payout Ratio Formula (Cash Flow Measurement Formula) is relatively straightforward:

Divide total annual dividend payments by annual Net Income plus Noncash Expenses minus Noncash Sales.

Calculating the Dividend Payout Ratio during one year provides a very unreliable indication only. A better approach is to run a trend line on the ratio during several years to see if a general pattern of decline or increase emerges.

This ratio is useful in projecting the growth of company as well.

### Retention Ratio

Its inverse, the Retention Ratio (the amount not paid out to shareholders in the form of dividends), can help to predict a company's growth.

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