Ratios Made Simple by Robert Leach

Author:Robert Leach
Language: eng
Format: epub
Publisher: Harriman House

How to use the dividend payout ratio as an investor

This ratio tells the investor how much of that year’s profit has been distributed to shareholders rather than retained for the company’s future needs. Ultimately all profits earned should benefit the shareholder, either in terms of dividend or in terms of capital growth and future profits. This ratio is therefore more concerned with the timing of the return than its amount.

An investor who is looking for an income stream will tend to favour a higher ratio, whereas a long-term investor looking for capital growth may favour a lower ratio.

An investor should be concerned if the ratio is too high, particularly for consecutive years. This could indicate an unsustainable dividend policy which restricts the company’s ability to earn future profits.

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