Dividends - Payout Ratio vs Retention Ratio | Summary and Q&A

TL;DR

The payout ratio measures dividends as a percentage of net income, while the retention ratio represents the portion of earnings retained by the company. These two ratios must add up to 100% or one.

Key Insights

• 🥳 The payout ratio is calculated by dividing dividends by net income and should ideally be under 100% for sustainability.
• 🥳 The retention ratio represents the portion of earnings retained by the company and should add up to the complement of the payout ratio (100% - payout ratio).
• 😘 A low payout ratio suggests that a company is retaining earnings, possibly to pay off debt or expand its operations.
• 🥳 A company with a high payout ratio may not have enough retained earnings for future dividends or growth.
• 🥳 The payout and retention ratios provide insights into a company's dividend policy and financial health.
• 🥳 Companies with balanced payout and retention ratios are better positioned for future stability and growth.
• 🥳 A payout ratio above 100% indicates unsustainable dividend payments.

Transcript

in this video we're going to talk about the payout ratio and the retention ratio the payout ratio is also referred to as the dividend payout ratio because it relates to dividends to calculate the payout ratio which i'm going to call pr it's equal to the total dividends paid by a company that is in a year divided by the annual net income the retenti... Read More

Questions & Answers

Q: What is the payout ratio, and how is it calculated?

The payout ratio measures the dividends paid by a company as a percentage of its net income. It is calculated by dividing total dividends paid by the annual net income.

Q: How is the retention ratio determined?

The retention ratio is calculated by dividing retained earnings by net income. It represents the portion of earnings that the company chooses to retain rather than paying out as dividends.

Q: What should companies aim for when it comes to payout and retention ratios?

Ideally, the payout and retention ratios should add up to 100% or one. This balance ensures that companies are distributing dividends while retaining enough earnings for future growth or to address financial obligations.

Q: Can a company have a payout ratio above 100%?

A payout ratio above 100% implies that the company is paying out more dividends than its earnings. This is unsustainable and indicates that the company is losing money.

Summary & Key Takeaways

• The payout ratio compares dividends paid by a company to its annual net income.

• The retention ratio calculates the portion of earnings retained by the company.

• Payout and retention ratios need to add up to 100% or one.