Dividend payout ratio is a term used to denote the share of earning that is paid to the shareholders in form of dividends. To bring out the exact dividend payout ratio, the total amount paid as dividend is divided by the net income of the company. The ratio of dividend payment gives an idea about the present financial situation of the company.
Generally, the companies with sound economic background provides higher dividend payout ratio than the small or new companies. Higher ratios of dividend payment also provide the investors with the opportunity to cope with inflation and also help in increasing the money income in the post-retirement period.
Apart from all these aspects, there are certain other factors, which should also be considered in the context of dividend payment ratio. An investor, who is investing in the stocks, is sure to expect something between 40%-60% as the ratio of dividend payment of the company.
This is certainly going to make the investors financially strong; as a result of which his or her investment portfolio is expected to look better. But at the same time, it should also be considered that the company needs to invest its profits in the business so that it can grow much rapidly.
But if the company’s dividend payout ratio is quite high, then it is obvious that the company would invest much of its profits in paying the dividends. In these situations, the growth rate of the company is bound to be very slow.
Continuous growth of the company in turn ensures financial growth of the investors as well. In future, if the company earns high, the investors will also get proportionate returns. It is possible for a lot of companies to provide huge amount as dividends but surely for a small period. From an investors point of view, it is much more important that the returns are regular and meant for a long time. A company should also take care of maintaining a balance between profit making and distribution of that profit. It can help the companies to sustain a healthy growth rate.
In order to maintain steady financial growth of the investors as well as the company itself, the dividend payout ratio should be designed properly.