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

by Susan Reynolds

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.

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

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.

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.

Tip

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

Items you will need

  • Calculator
  • Company stock report

Photo Credits

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