How to Calculate the Value of a Stock With the Dividend Payout Ratio

A low dividend payout ratio means the company is saving money for the future.

A low dividend payout ratio means the company is saving money for the future.

As a company's shareholder, you are a partial owner of the company and are entitled to a share of its annual profits. These distributions to shareholders are called dividend payments. When a company makes a profit for the year, it doesn't pay everything out to its shareholders. Some money is kept in the company for future growth. The dividend payout ratio is a simple calculation that shows what percentage of a company's income goes to its shareholders. This calculation lets you calculate whether a company meets your investment goals or if you need to take your money elsewhere.

Step 1

Read through your company's financial statements for its earnings per share and dividend per share payment over the past year. This information will be listed on the income statement.

Step 2

Divide the dividend payment by the earnings per share to calculate the dividend payout ratio. If a company earned $1 per share and paid out a dividend of $0.50, the dividend payout ratio is 0.50/1 = 0.50.

Step 3

Multiply your dividend payout ratio by 100 to see what percentage of earnings are being paid out as a dividend. If the dividend payout ratio is 0.50, the percentage of earnings being paid out is 0.50x100 = 50 percent. The company is paying out half of its earnings to shareholders and keeping half in the business.

Step 4

Compare the dividend percentage to your investment goals to measure the value of the stock. A ratio of 40 percent to 60 percent is standard and gives a balance between growth and income. If you want as much income as possible, you want a percentage over 60 percent. If you you high stock growth, you want a percentage below 40.

About the Author

David Rodeck has been writing professionally since 2011. He specializes in insurance, investment management and retirement planning for various websites. He graduated with a Bachelor of Science in economics from McGill University.

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