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How to Calculate Dividend Payout Ratio (With Worked Example)

Dividend payout ratio is dividends per share divided by earnings per share. It tells you what share of the profit is paid out as dividends — and whether the dividend is affordable.

What is dividend payout ratio?

Dividend payout ratio is dividends per share divided by earnings per share. It tells you what share of a company’s profit is paid out to shareholders as dividends — how much of each dollar earned goes back to owners, and how much stays in the business.

A ratio of 40.00% means 40 cents of every dollar of earnings is paid out and 60 cents is kept. The kept part funds growth, pays down debt, or builds a buffer.

The dividend payout ratio formula

Dividend payout ratio = dividends per share ÷ earnings per share × 100. Retained per share = earnings per share − dividends per share. Retention ratio = 100% − payout ratio. Two more formulas turn the ratio around: dividends per share needed at a target = target ratio × earnings per share, and earnings per share allowed at a target = dividends per share ÷ target ratio. Total dividends divided by net income gives the same answer.

Step 1: work out the dividends per share

Dividends per share is what the company pays out per share each year: total dividends paid in the year divided by the number of shares, or the per-share dividend straight from the company’s dividend history. In our example it is $2.00. Use the full year, not one quarter, and the same year for both figures.

Step 2: work out the earnings per share

Earnings per share is what the company earns per share — net income divided by the number of shares. Try the earnings per share calculator if you only have the totals. In our example it is $5.00. Use the same year as the dividends, and watch for one-off earnings — a single asset sale can make earnings look far bigger than the business really earns.

Step 3: divide the dividends per share by the earnings per share

Divide $2.00 by $5.00 and multiply by 100: $2.00 ÷ $5.00 = 0.40, and 0.40 × 100 = 40.00%. That is the whole calculation. The retained per share is $5.00 − $2.00 = $3.00 — 60.00% of earnings stays in the business. Try it on the dividend payout ratio calculator and check the answer against your own arithmetic.

Three worked examples

Example 1 — the main example. $2.00 of dividends per share on $5.00 of earnings per share: $2.00 ÷ $5.00 × 100 = 40.00%. Retained per share: $5.00 − $2.00 = $3.00 (60.00% retained). For a 50.00% target: dividends per share needed is 50.00% × $5.00 = $2.50, and earnings per share allowed is $2.00 ÷ 50.00% = $4.00.

Example 2 — the rounding trap. $4.00 of dividends on $6.00 of earnings: $4.00 ÷ $6.00 × 100 = 66.67% — but the unrounded ratio is 66.6667%, so it displays as 66.67% while sitting below the 66.67% target.

Example 3 — the low end. $2.00 of dividends on $6.00 of earnings: $2.00 ÷ $6.00 × 100 = 33.33% — the unrounded ratio is 33.3333%, so it displays as 33.33% while sitting above 33.33% unrounded.

One reverse to check your answer

Work it backwards: the smallest whole-cent dividends per share for the ratio to reach 50.00% is $2.50 — at $2.50 the ratio is 50.00%, exactly 50.00%, and at $2.49 it is 49.80%. The largest whole-cent earnings per share for the ratio to stay at or above 50.00% is $4.00 — at $4.00 the ratio is 50.00%, and at $4.01 it is 49.88% (unrounded 49.8753%). If your answer does not survive the reverse, the arithmetic is wrong.

What a good ratio looks like

0% — growth companies. A company that pays no dividend at all reinvests everything. Young growth companies commonly pay nothing, and a 0% ratio is not a failure.

30–50% — mature companies. The steady middle: enough to reward shareholders and enough kept to keep growing. A 40.00% ratio sits here.

Above 100% — unsustainable. The company paid out more than it earned, possible for a year or two from reserves or borrowing, but it cannot last. A rising ratio on falling earnings is the classic dividend-cut warning.

The 66.6667% rounding trap

The ratio is displayed to two decimals, half-up — and the display can lie by a hair. $4.00 of dividends on $6.00 of earnings is 66.6667% unrounded: it displays as 66.67%, but it sits below the 66.67% target — so $4.00 is not enough to reach 66.67%, and the smallest whole-cent dividends per share that reaches it is $4.01 (66.8333% unrounded, displaying as 66.83%). Print the unrounded ratio when the answer is close to a round target — the calculator does.

What a negative ratio means

At −$5.00 of earnings per share, $2.00 of dividends gives a ratio of −40.00%. Negative earnings means the company lost money yet still paid a dividend — a data problem, not a real payout. The calculator shows the negative figure with a note, never hides it.

What if the earnings per share is zero?

At $0 of earnings per share the ratio is undefined — there are no earnings to pay from, so there is nothing to divide by. The calculator shows the ratio as undefined with that note, never a crash and never a made-up number. No retained-per-share figure is printed for that case, because retained is meaningless with no earnings.

The 120.00% over-100% case

$6.00 of dividends per share on $5.00 of earnings per share is 120.00% — the company paid out more than it earned, and the retained per share is −$1.00. Paying out more than the company earned is possible only from reserves or borrowing, and it cannot last. A ratio over 100% is the loudest warning the ratio gives.

How it differs from dividend yield

Dividend yield is dividends per share divided by the share PRICE — it tells you the income on the price you pay. The payout ratio is dividends per share divided by EARNINGS — it tells you whether the dividend is affordable. A share can have a high yield and a dangerous payout: the price fell, the yield rose, and the earnings cannot cover the dividend. Read both together — the dividend yield guide covers the yield side, and the dividend yield calculator works it out. It also differs from the price-to-earnings ratio — see the price-to-earnings ratio calculator — and from the operations ratios — see the operations ratios calculator.

The mistakes to avoid

Mixing years: dividends and earnings from different years answer nothing.

Using a one-off: a single asset sale can inflate earnings and shrink the ratio.

Trusting the display: print the unrounded figure when the answer is close to the target.

Ignoring buybacks: a 20% dividend plus buybacks can return more cash than a 40% dividend alone.

Reading a high ratio as generosity: a 90% payout with no growth keeps nothing to invest.

Frequently asked questions

Frequently asked questions

What is the inventory turnover ratio?

Cost of goods sold divided by average inventory. On $800,000 of cost of goods sold and $200,000 of average inventory the ratio is 4.00 times — the whole stock sells and is replaced four times a year.

How do I calculate the inventory turnover ratio?

Divide the cost of goods sold by the average inventory. $800,000 ÷ $200,000 = 4.00 times.

What does a 4.00 inventory turnover ratio mean?

The whole stock sells and is replaced four times a year. A 4.00 ratio means the stock sells in 91.25 days — about every three months the shelves turn over completely.

How much do I need to sell for a 6.00 turnover?

$1,200,000 of cost of goods sold with $200,000 of average inventory. The smallest whole-dollar cost of goods sold for the ratio to reach 6.00 is $1,200,000. At $1,200,000 the ratio is 6.00 times, exactly 6.00.

How much inventory can I hold and still keep a 6.00 turnover?

$133,333 with $800,000 of cost of goods sold. The largest whole-dollar average inventory for the ratio to stay at or above 6.00 is $133,333. At $133,333 the ratio is 6.000015 — displays 6.00 but is above the 6.00 target.

What does a negative inventory turnover ratio mean?

The cost of goods sold printed negative. At −$50,000 of cost of goods sold the ratio is −0.25 — returns and adjustments exceeded purchases — a data problem, not a real turnover — and the calculator shows the negative figure with a note, never hides it and never shows “—” for it.

What if the average inventory is zero?

The ratio is undefined. At $0 of average inventory the ratio is undefined — there is no stock to turn over, so there is nothing to divide by — shown as undefined with that note, never a crash and never a made-up number.

How is inventory turnover different from inventory to sales?

Inventory to sales divides sales by inventory, which uses the selling price. It overstates turnover whenever margins are high — cost of goods sold is the honest numerator, so inventory turnover is the ratio that says how fast the stock really moves.

Related calculators

Dividend Payout Ratio Calculator: What Share Is Paid OutWork out your dividend payout ratio and what stays in the business. Dividend Yield Calculator: Income on the Price You PayWork out the income your shares pay against the price you pay. Earnings Per Share Calculator: Profit Per ShareWork out the earnings per share for a company. Price to Earnings Ratio Calculator: P/E in One StepWork out the price to earnings ratio for a share. Operations Ratios Calculator: Inventory, DSO & Cycle TimeWork out the operations ratios for a business in one place. How to Calculate Dividend YieldThe guide to dividend yield, step by step.