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Wednesday, October 07, 2015

Dividend Payout and Optimal Dividend Payout Ratio

Dividend Payout Ratio and Optimal Dividend Payout Ratio
The dividend payout ratio measures the percentage of net income that is distributed to shareholders in the form of dividends during the year. In other words, this ratio shows the portion of profits the company decides to keep to fund operations and the portion of profits that is given to its shareholders. Investors are particularly interested in the dividend payout ratio because they want to know if companies are paying out a reasonable portion of net income to investors. The dividend payout formula is calculated by dividing total dividend by the net income of the company i.e.

Dividend Payout Ratio = Total Dividend/Net income

Optimal Dividend Payout Ratio: Dividend payout ratio maximises the firm’s value. A payout ratio which maximises the firm’s value is called optimal dividend payout ratio. A firm achieves this dividend payout-ratio at that point where it minimises the total cost of financing.  The minimization of sum of total cost of financing produces a unique dividend payout ratio for the firm.