The dividend payout ratio is the share of a period’s net income that a corporation pays out to its shareholders as dividends instead of keeping in the business. It is dividends divided by net income for the same period, usually stated as a percentage, and its complement is the retention ratio, the share the corporation keeps. Payout ratio and D/P ratio name the same measure.
The Two Forms of the Formula
Both forms answer the same question in different units.
dividend payout ratio = dividends / net income x 100
= dividends per share / earnings per share x 100The aggregate form takes the period’s dividends over the period’s bottom line. The per share form divides both totals by a share count first. They agree when a single class of shares is outstanding for the whole period, and they can part company when it is not, because earnings per share is a computed figure with conventions of its own rather than net income divided by the share count on the closing date. The share count behind the per share form is an outstanding-share count rather than every share ever issued, and what that leaves out is in treasury shares.
Whether the numerator is the dividend declared or the dividend paid, the retention ratio, and the rest of the family sit in dividend ratios.
A Worked Example
Say a corporation closes a year on the figures below, with one class of shares outstanding and unchanged throughout, and the year’s dividend both declared and paid inside it.
Net income for the year 400,000
Dividends declared and paid 90,000
Shares outstanding, all year 100,000
Dividend payout ratio 90,000 / 400,000 = 22.5%
Retention ratio 100% - 22.5% = 77.5%
Dividends per share 90,000 / 100,000 = 0.90
Earnings per share 400,000 / 100,000 = 4.00
Dividend payout ratio 0.90 / 4.00 = 22.5%The percentage carries no information about the size of either input. A corporation earning a small profit and distributing most of it lands near the same figure as one earning a large profit and distributing the same share of it.
Where the Inputs Come From
Both inputs are outputs of work already done, so neither is a number the ratio itself produces. Net income is the bottom line of the income statement for the period, and the order the subtractions run in to reach it is set out in net income. Nothing is added back to that figure here.
Dividends are read off the equity side rather than the income statement, because a dividend distributes profit and is not an expense of earning it.
Once paid, the dividend takes on a reporting life of its own, and the filing trigger is low. A payer files Form 1099-DIV for each person to whom it has paid dividends, including capital gain dividends and exempt-interest dividends, and other distributions valued at $10 or more in money or other property, and for each person from whom it has withheld any federal income tax on dividends under the backup withholding rules, whatever the amount (IRS, Instructions for Form 1099-DIV).
An S Corporation Distribution Is Not a Dividend
This is the distinction that decides whether the ratio reaches a client at all. A distribution from an S corporation is generally a return of the shareholder’s own investment rather than a payout of corporate profit, so it does not belong in the numerator. An S corporation reports as dividends on Form 1099-DIV only distributions made during the tax year out of accumulated earnings and profits (IRS, Instructions for Form 1099-DIV), and the Code sets out what happens on either side of that line.
Where the S corporation has no accumulated earnings and profits, the distribution is not included in gross income to the extent it does not exceed the adjusted basis of the stock, and any excess is treated as gain from the sale or exchange of property (26 U.S.C. 1368(b)). Where it does have accumulated earnings and profits, the portion that does not exceed the accumulated adjustments account is treated the same way, and only what remains after that is treated as a dividend, to the extent it does not exceed those accumulated earnings and profits (26 U.S.C. 1368(c)). Anything still remaining falls back into the same basis and gain treatment that applies where there are no accumulated earnings and profits (26 U.S.C. 1368(c)(3)). The accumulated adjustments account named there is an account of the S corporation adjusted over the S period in a manner similar to the adjustments under section 1367 (26 U.S.C. 1368(e)(1)(A)).
So the numerator exists only where the distribution is a dividend, which means a C corporation or an S corporation still carrying accumulated earnings and profits from C years. An S corporation that has always been one generally carries no accumulated earnings and profits, which leaves nothing to report as a dividend and no numerator to divide. A partnership does not pay dividends at all, so there is no dividends paid figure to put over anything either. The entity mechanics behind that split are in c corp vs s corp and s corporation. A stock dividend is not a cash payout either, and how it separates from a split is in stock split.
Common Questions
No accounting standard or securities rule sets one. The ratio describes a decision the directors have already taken, and whether a dividend gets declared at all sits with them, which is covered in stockholder.
A shareholder asking that usually wants their own dividends rather than the corporation’s ratio, and the two are different figures. The shareholder’s own total for the year is what the payer reports on their Form 1099-DIV where those filing triggers are met. The payout ratio is a company-level measure and cannot be worked out from one holder’s statements.
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