All right. Let's discuss a ratio here, the dividend payout ratio. So the 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? Notice our dividend payout ratio, we're going to take the cash dividends that are paid to our shareholders and we're going to divide it by net income. So it's going to 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 net income, that generally doesn't happen. You wouldn't have a ratio above 100%. And we usually show this as a percentage, so you'll want to multiply by a 100 to get to percentage mode. But what happens is most companies are going to aim to have a dividend payout that they maintain year to year. So they might say, oh, we're going to 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? That's not necessarily a bad thing either. That could just mean that 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 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 year, every quarter for a long time, and all of a sudden they're cutting that down. They're like, oh we're going to pay less dividends. You might want to 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 going to 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 going to 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.
14. Financial Statement Analysis
Ratios: Payout Ratio
14. Financial Statement Analysis
Ratios: Payout Ratio - Online Tutor, Practice Problems & Exam Prep
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concept
Ratios: Payout Ratio
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Video transcript
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Problem
ProblemConsistoCo 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?
A
$70,000
B
$140,000
C
$190,000
D
$240,000
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Problem
ProblemDive 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?
A
$20,000
B
$8,000
C
$18,750
D
$15,000