{"id":381,"date":"2024-09-06T16:49:17","date_gmt":"2024-09-06T16:49:17","guid":{"rendered":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/chapter\/dividend-payout-ratio\/"},"modified":"2024-09-11T20:12:50","modified_gmt":"2024-09-11T20:12:50","slug":"dividend-payout-ratio","status":"publish","type":"chapter","link":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/chapter\/dividend-payout-ratio\/","title":{"raw":"Dividend Payout Ratio","rendered":"Dividend Payout Ratio"},"content":{"raw":"<section class=\"textbox learningGoals\" aria-label=\"Learning Goals\">\r\n<ul>\r\n \t<li>Calculate the dividend payout ratio<\/li>\r\n<\/ul>\r\n<\/section>&nbsp;\r\n\r\nThe dividend payout ratio is the ratio of the total amount of dividends paid out to shareholders relative to the net income of the company[latex]\\left(\\dfrac{\\text{common stock dividends}}{\\text{net income}}\\right)[\/latex]. The amount that is not paid to shareholders is retained by the company to pay off debt or to reinvest in core operations.\r\n<div class=\"table-wrapper\">\r\n<table class=\"fin-table acctstatement\"><caption>Jonick Company\r\nComparative Income Statement\r\nFor the Years Ended December 31, 2019 and 2018<\/caption>\r\n<tbody>\r\n<tr>\r\n<th class=\"u-sr-only\" scope=\"col\">Description<\/th>\r\n<th scope=\"col\">2019<\/th>\r\n<\/tr>\r\n<tr>\r\n<td>Income before income tax<\/td>\r\n<td class=\"r\">$314,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Income tax expense<\/td>\r\n<td class=\"r\">66,000<\/td>\r\n<\/tr>\r\n<tr class=\"highlight\">\r\n<td><strong>Net income<\/strong><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$248,000 <span class=\"u-sr-only\">Double Line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<table class=\"fin-table acctstatement\"><caption>Jonick Company\r\nComparative Retained Earnings Statement\r\nFor the Years Ended December 31, 2019 and 2018<\/caption>\r\n<tbody>\r\n<tr>\r\n<th class=\"u-sr-only\" scope=\"col\">Description<\/th>\r\n<th scope=\"col\">2019<\/th>\r\n<\/tr>\r\n<tr>\r\n<td>Retained earnings, beginning of year<\/td>\r\n<td class=\"r\">$2,198,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Net income<\/td>\r\n<td class=\"r\">248,000<\/td>\r\n<\/tr>\r\n<tr class=\"highlight\">\r\n<td>Less: Preferred stock dividends<\/td>\r\n<td class=\"r\">12,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0 \u00a0 \u00a0 Common stock dividends<\/td>\r\n<td class=\"r\">8,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Increase in retained earnings<\/td>\r\n<td class=\"r line-single\">20,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Retained earnings, end of year<\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$2,426,000<span class=\"u-sr-only\">Double Line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\nIn this example, the dividend payout ratio would be [latex]\\dfrac{\\$8,000}{\\$248,000} = 3.23\\%[\/latex].\r\n\r\nFor another useful analysis of dividends, we could calculate dividends per share on common stock:\r\n<p style=\"padding-left: 30px;\">[latex]\\dfrac{\\text{common stock dividends}}{\\text{common stock shares outstanding}}[\/latex]<\/p>\r\n<p style=\"padding-left: 30px;\">For example: [latex]\\dfrac{8,000}{\\frac{83,000}{\\$10}}=\\$0.96[\/latex]<\/p>\r\nShares outstanding are usually disclosed on the face of the financial statements, but in the case of Jonick, we can figure out the number of shares outstanding even though it isn\u2019t disclosed overtly, by dividing the common stock dollar amount by the par value per share given ($83,000 in common stock with a $10 par value would be 8,300 shares issued and outstanding).\r\n<div class=\"table-wrapper\">\r\n<table class=\"fin-table acctstatement\"><caption>Jonick Company\r\nComparative Retained Earnings Statement\r\nFor the Years Ended December 31, 2019 and 2018<\/caption>\r\n<tbody>\r\n<tr>\r\n<th class=\"u-sr-only\" scope=\"col\">Description<\/th>\r\n<th scope=\"col\">2019<\/th>\r\n<\/tr>\r\n<tr>\r\n<td>Retained earnings, beginning of year<\/td>\r\n<td class=\"r\">$2,198,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Net income<\/td>\r\n<td class=\"r\">248,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Less: Preferred stock dividends<\/td>\r\n<td class=\"r\">12,000<\/td>\r\n<\/tr>\r\n<tr class=\"highlight\">\r\n<td>\u00a0 \u00a0 \u00a0 Common stock dividends<\/td>\r\n<td class=\"r\">8,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Increase in retained earnings<\/td>\r\n<td class=\"r line-single\">20,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Retained earnings, end of year<\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$2,426,000<span class=\"u-sr-only\">Double Line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<table class=\"fin-table acctstatement\"><caption>Jonick Company\r\nComparative Balance Sheet\r\nDecember 31, 2019 and 2018<\/caption>\r\n<tbody>\r\n<tr>\r\n<th><\/th>\r\n<th scope=\"col\">2019<\/th>\r\n<\/tr>\r\n<tr>\r\n<td colspan=\"2\"><span style=\"text-transform: uppercase;\"><strong>Stockholders' Equity<\/strong><\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Preferred $1.50 stock, $20 par<\/td>\r\n<td class=\"r\">$166,000<\/td>\r\n<\/tr>\r\n<tr class=\"highlight\">\r\n<td>Common stock, $10 par<\/td>\r\n<td class=\"r\">83,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Retained earnings<\/td>\r\n<td class=\"r\">2,426,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0 \u00a0 \u00a0 <strong>Total stockholders' equity<\/strong><\/td>\r\n<td class=\"r\">$2,675,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><strong>Total liabilities and stockholders' equity<\/strong><\/td>\r\n<td class=\"r line-double line-single\"><span class=\"u-sr-only\">Single Line<\/span>$3,950,000<span class=\"u-sr-only\">Double Line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\nTherefore, $8,000 in dividends equates to an annual dividend payout of $0.96 per share.\r\n\r\nIf this was a publicly traded company or if there was a readily available market value per share (e.g. an offer to buy the company on the table or a recent purchase), we could also calculate the dividend yield by dividing the dividend per share by the market price per share.\r\n\r\nFor this example, assume we have an established market price per share of $70.\r\n\r\nWith a dividend payout of $0.96 and a market price of $70, the dividend yield would be [latex]\\dfrac{.96}{70} = 0.01371429\u2026[\/latex] or approximately 1.4%.\r\n\r\nFor an investor looking for income, rather than growth, this number would allow a comparison between different alternatives. For instance, if low-risk tax-exempt municipal bonds were paying 2%, an investor might opt for the bonds over an investment in the stock.\r\n\r\nNow, let's practice what you've learned.\r\n\r\n<section class=\"textbox tryIt\" aria-label=\"Try It\">[ohm2_question hide_question_numbers=1]25257[\/ohm2_question]<\/section>","rendered":"<section class=\"textbox learningGoals\" aria-label=\"Learning Goals\">\n<ul>\n<li>Calculate the dividend payout ratio<\/li>\n<\/ul>\n<\/section>\n<p>&nbsp;<\/p>\n<p>The dividend payout ratio is the ratio of the total amount of dividends paid out to shareholders relative to the net income of the company[latex]\\left(\\dfrac{\\text{common stock dividends}}{\\text{net income}}\\right)[\/latex]. The amount that is not paid to shareholders is retained by the company to pay off debt or to reinvest in core operations.<\/p>\n<div class=\"table-wrapper\">\n<table class=\"fin-table acctstatement\">\n<caption>Jonick Company<br \/>\nComparative Income Statement<br \/>\nFor the Years Ended December 31, 2019 and 2018<\/caption>\n<tbody>\n<tr>\n<th class=\"u-sr-only\" scope=\"col\">Description<\/th>\n<th scope=\"col\">2019<\/th>\n<\/tr>\n<tr>\n<td>Income before income tax<\/td>\n<td class=\"r\">$314,000<\/td>\n<\/tr>\n<tr>\n<td>Income tax expense<\/td>\n<td class=\"r\">66,000<\/td>\n<\/tr>\n<tr class=\"highlight\">\n<td><strong>Net income<\/strong><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$248,000 <span class=\"u-sr-only\">Double Line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<table class=\"fin-table acctstatement\">\n<caption>Jonick Company<br \/>\nComparative Retained Earnings Statement<br \/>\nFor the Years Ended December 31, 2019 and 2018<\/caption>\n<tbody>\n<tr>\n<th class=\"u-sr-only\" scope=\"col\">Description<\/th>\n<th scope=\"col\">2019<\/th>\n<\/tr>\n<tr>\n<td>Retained earnings, beginning of year<\/td>\n<td class=\"r\">$2,198,000<\/td>\n<\/tr>\n<tr>\n<td>Net income<\/td>\n<td class=\"r\">248,000<\/td>\n<\/tr>\n<tr class=\"highlight\">\n<td>Less: Preferred stock dividends<\/td>\n<td class=\"r\">12,000<\/td>\n<\/tr>\n<tr>\n<td>\u00a0 \u00a0 \u00a0 Common stock dividends<\/td>\n<td class=\"r\">8,000<\/td>\n<\/tr>\n<tr>\n<td>Increase in retained earnings<\/td>\n<td class=\"r line-single\">20,000<\/td>\n<\/tr>\n<tr>\n<td>Retained earnings, end of year<\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$2,426,000<span class=\"u-sr-only\">Double Line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>In this example, the dividend payout ratio would be [latex]\\dfrac{\\$8,000}{\\$248,000} = 3.23\\%[\/latex].<\/p>\n<p>For another useful analysis of dividends, we could calculate dividends per share on common stock:<\/p>\n<p style=\"padding-left: 30px;\">[latex]\\dfrac{\\text{common stock dividends}}{\\text{common stock shares outstanding}}[\/latex]<\/p>\n<p style=\"padding-left: 30px;\">For example: [latex]\\dfrac{8,000}{\\frac{83,000}{\\$10}}=\\$0.96[\/latex]<\/p>\n<p>Shares outstanding are usually disclosed on the face of the financial statements, but in the case of Jonick, we can figure out the number of shares outstanding even though it isn\u2019t disclosed overtly, by dividing the common stock dollar amount by the par value per share given ($83,000 in common stock with a $10 par value would be 8,300 shares issued and outstanding).<\/p>\n<div class=\"table-wrapper\">\n<table class=\"fin-table acctstatement\">\n<caption>Jonick Company<br \/>\nComparative Retained Earnings Statement<br \/>\nFor the Years Ended December 31, 2019 and 2018<\/caption>\n<tbody>\n<tr>\n<th class=\"u-sr-only\" scope=\"col\">Description<\/th>\n<th scope=\"col\">2019<\/th>\n<\/tr>\n<tr>\n<td>Retained earnings, beginning of year<\/td>\n<td class=\"r\">$2,198,000<\/td>\n<\/tr>\n<tr>\n<td>Net income<\/td>\n<td class=\"r\">248,000<\/td>\n<\/tr>\n<tr>\n<td>Less: Preferred stock dividends<\/td>\n<td class=\"r\">12,000<\/td>\n<\/tr>\n<tr class=\"highlight\">\n<td>\u00a0 \u00a0 \u00a0 Common stock dividends<\/td>\n<td class=\"r\">8,000<\/td>\n<\/tr>\n<tr>\n<td>Increase in retained earnings<\/td>\n<td class=\"r line-single\">20,000<\/td>\n<\/tr>\n<tr>\n<td>Retained earnings, end of year<\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$2,426,000<span class=\"u-sr-only\">Double Line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<table class=\"fin-table acctstatement\">\n<caption>Jonick Company<br \/>\nComparative Balance Sheet<br \/>\nDecember 31, 2019 and 2018<\/caption>\n<tbody>\n<tr>\n<th><\/th>\n<th scope=\"col\">2019<\/th>\n<\/tr>\n<tr>\n<td colspan=\"2\"><span style=\"text-transform: uppercase;\"><strong>Stockholders&#8217; Equity<\/strong><\/span><\/td>\n<\/tr>\n<tr>\n<td>Preferred $1.50 stock, $20 par<\/td>\n<td class=\"r\">$166,000<\/td>\n<\/tr>\n<tr class=\"highlight\">\n<td>Common stock, $10 par<\/td>\n<td class=\"r\">83,000<\/td>\n<\/tr>\n<tr>\n<td>Retained earnings<\/td>\n<td class=\"r\">2,426,000<\/td>\n<\/tr>\n<tr>\n<td>\u00a0 \u00a0 \u00a0 <strong>Total stockholders&#8217; equity<\/strong><\/td>\n<td class=\"r\">$2,675,000<\/td>\n<\/tr>\n<tr>\n<td><strong>Total liabilities and stockholders&#8217; equity<\/strong><\/td>\n<td class=\"r line-double line-single\"><span class=\"u-sr-only\">Single Line<\/span>$3,950,000<span class=\"u-sr-only\">Double Line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>Therefore, $8,000 in dividends equates to an annual dividend payout of $0.96 per share.<\/p>\n<p>If this was a publicly traded company or if there was a readily available market value per share (e.g. an offer to buy the company on the table or a recent purchase), we could also calculate the dividend yield by dividing the dividend per share by the market price per share.<\/p>\n<p>For this example, assume we have an established market price per share of $70.<\/p>\n<p>With a dividend payout of $0.96 and a market price of $70, the dividend yield would be [latex]\\dfrac{.96}{70} = 0.01371429\u2026[\/latex] or approximately 1.4%.<\/p>\n<p>For an investor looking for income, rather than growth, this number would allow a comparison between different alternatives. For instance, if low-risk tax-exempt municipal bonds were paying 2%, an investor might opt for the bonds over an investment in the stock.<\/p>\n<p>Now, let&#8217;s practice what you&#8217;ve learned.<\/p>\n<section class=\"textbox tryIt\" aria-label=\"Try It\"><iframe loading=\"lazy\" id=\"ohm25257\" class=\"resizable\" src=\"https:\/\/ohm.one.lumenlearning.com\/multiembedq.php?id=25257&theme=lumen&iframe_resize_id=ohm25257&source=tnh\" width=\"100%\" height=\"150\"><\/iframe><\/section>\n","protected":false},"author":6,"menu_order":19,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Dividend Payout Ratio\",\"author\":\"Joseph Cooke\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"Principles of Financial Accounting\",\"author\":\"Christine Jonick\",\"organization\":\"\",\"url\":\"https:\/\/web.ung.edu\/media\/university-press\/Principles-of-Financial-Accounting.pdf?t=1601063299615\",\"project\":\"\",\"license\":\"cc-by-sa\",\"license_terms\":\"\"}]","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"part":362,"module-header":"- Select Header -","content_attributions":[{"type":"original","description":"Dividend Payout Ratio","author":"Joseph Cooke","organization":"Lumen Learning","url":"","project":"","license":"cc-by","license_terms":""},{"type":"cc","description":"Principles of Financial Accounting","author":"Christine Jonick","organization":"","url":"https:\/\/web.ung.edu\/media\/university-press\/Principles-of-Financial-Accounting.pdf?t=1601063299615","project":"","license":"cc-by-sa","license_terms":""}],"internal_book_links":[],"video_content":null,"cc_video_embed_content":{"cc_scripts":"","media_targets":[]},"try_it_collection":null,"_links":{"self":[{"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/381"}],"collection":[{"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/wp\/v2\/users\/6"}],"version-history":[{"count":3,"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/381\/revisions"}],"predecessor-version":[{"id":977,"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/381\/revisions\/977"}],"part":[{"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/pressbooks\/v2\/parts\/362"}],"metadata":[{"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/381\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/wp\/v2\/media?parent=381"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/pressbooks\/v2\/chapter-type?post=381"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/wp\/v2\/contributor?post=381"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/wp-json\/wp\/v2\/license?post=381"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}