Dividend Income

Effect Of Dividend Payout Ratio On Company Financial Statement?

Effect Of Dividend Payout Ratio On Company Financial Statement?

A company pays out dividend from their retained earning. Retained earning comes from cash flow. There are instances when corporations took out debt to pay dividend to continue track record. In recent times, many energy companies did that, because the crude price dropped. If your company does this, sell the stocks. This is definitely a disastrous practice. Dividends should be given to investors after company makes a profit. Dividend Payout Ratio is pretty much the percentage of cash a company pays out from their cashflow.

Coming to financial statements, there are balance sheets, profit and loss statement and then cash flow statement. Cash flow statement gives you idea on the activities related to cash coming in and going out. As dividends are given out from retained earning, it is captured in cash flow statement as an outgoing item.

Dividend Payout Ratio

This is an example cash flow statement and I have highlighted the Dividends Paid line item. As you can see the entries are negative number, because they have gone out. Say, profit was 100 rs and dividend paid is 50rs, so retained earning will be 50rs, considering there is no tax, capex, loan interest etc.

Now, based on amount of dividend the retained earning will be more or less. If the company decides to pay only 20rs as dividend then the company will retain 80rs, again considering there are no other expenses. The reverse is true too. The company may decide to pay all 100rs as dividend, in that case it will not have any retained earning for that financial year.

so, What Is The Dividend Payout Ratio On Company Financial Statement? Considering the company has a pay out ratio of 60%, in that case the company pays out 60% of Net Income as dividend, that means the retained earning , which could be used for further investment or expansion, has to be done with rest 40%. Higher the dividend payout ratio, lower the amount the company is left with for other activities. As companies mature, they usually dividend payout more cash as dividends.

This is just for common stocks though, if you want to invest in ReITs or InVits, then you might find out the dividend payout ratio is more than 100%.

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I am Abhiroop. I started working in IT services industry in the year 2007. I have worked in 3 continents. Currently, I live and work in the USA. While blogging was one of my hobbies that I picked up in college, I fell in love with the stock market in the year 2014. I purchased my first stock in 2008, and I sold them all after 2009. I did not know the power of compounding. Which was a HUGE MISTAKE. I intended to help everyone understand why we need to invest in stocks, hence I started this blog.

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