Financial Accounting

Learn the toughest concepts covered in your Financial Accounting class with step-by-step video tutorials and practice problems.

14. Financial Statement Analysis

Ratios: Payout Ratio



Ratios: Payout Ratio

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Alright, let's discuss a ratio here. The dividend payout ratio. So dividend payout ratio is just sometimes called the payout ratio. And guess what it's going to measure the percentage of earnings that are paid out distributed to the stockholders as dividends? So this doesn't really fit into the categories that much. But I guess it fits into a profitability ratio because we're dealing with net income here. Okay so notice our dividend payout ratio, we're gonna take the cash dividends that are paid to our shareholders and we're gonna divide it by net income. So it's gonna give us a ratio of how many dollars of dividends for each dollar of net income. You wouldn't expect there to be dividends higher than that income. That generally doesn't happen. You wouldn't have a ratio above 100%. And we usually show this as a percentage, so you want to multiply by 100 to get 2% mode. But what happens is most companies are gonna aim to have a dividend yield. Excuse me, a dividend payout that they maintain year to year. So they might say oh we're gonna pay out 5% of our earnings as dividends every year. So whatever the earnings end up being 5% of it, that's the dividend you can expect. Okay, so that depends on the company and some companies don't pay dividends at all. Right? And that's not necessarily a bad thing either. That could just be that they're they're focused on reinvesting into the company. So what does a low dividend ratio mean? Well like I said, it's not necessarily a bad thing. This this indicates that they're reinvesting in the company. That's funny, I just said that. And then the other thing is that a decrease in the payouts? Well this could indicate something, right, if they've had consistent dividend payouts every every year, every quarter for a long time and all of a sudden there cutting that down, they're like, oh we're gonna pay less dividends, you might wanna look into that. That could be a red flag of some financial problems, right? Because they're no longer as comfortable paying out those earnings as dividends, maybe they need that money for something else, Maybe they're just trying to reinvest and grow in the business, whatever it is, you're gonna want to look into it if it's been consistent year to year and now all of a sudden it's dropping as an investor, you're gonna want to check that out. Cool, Alright, so it's not such a crazy ratio, let's go ahead and do some practice problems and calculate our dividend payout ratio.

ConsistoCo has a policy to maintain a constant payout ratio from year to year. During the previous fiscal year, net income totaled $1,200,000 and ConsistoCo paid $240,000 in dividends. This year, due to the settlement of a lawsuit, the company had net income of $700,000. What amount of dividends would investors expect ConsistoCo to declare this year?


Dive Company maintains a policy to have a consistent payout ratio from year to year. Selected financial information for the company is as follows:

What amount of dividends would the company pay during the current year?