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How to Calculate the Value of a Stock With the Dividend Payout Ratio

Original post by Susan Reynolds of Demand Media

New companies typically have low payout ratios.

A dividend payout ratio is used by investors to see how much value a share of stock holds. The equation is expressed as stock dividends divided by the net income. A stock with a low ratio means that its value is lower than one with a higher ratio. Very high payout ratios seem desirable in a short-term setting, but the company is not investing much of the money back into the business, so growth may be slow.

Contents

Step 1

Look through a company's stock report and find the earnings per share and dividend per share. Write down these two numbers.

Step 2

Divide the dividend per share by its earnings per share - this is the dividend payout ratio. For example, if the dividend per share is $0.50 and its earnings per share is $2, you would divide $0.50 by $2.00 to get 0.25.

Step 3

Convert the figure into a percentage. In the example from the previous step, 0.25 turns into 25 percent. This means the fictional company paid 25 percent of its earnings per stock share as dividends that year. If a dividend payout ratio is between 40 to 60 percent, many investors consider the stock a healthy investment because it gives out a good profit to shareholders, while sustaining company growth.


                   

Tips & Warnings

  • A few companies only offer stock buybacks, not dividends, so the payout ratio would be less important.

Things Needed

  • Calculator
  • Company stock report

Resources

References

About the Author

Since completing her English degree in 2006 from the University of South Florida, Susan Reynolds has worked in real estate and higher education. She published her first article online in 2008. She now writes articles for many different websites and also writes marketing articles for various businesses in her hometown.

Photo Credits

  • Thinkstock/Comstock/Getty Images


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