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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Dividend Payout Ratio

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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