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.

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.

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.

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.

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.

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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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