Companies with High Dividend Payout Ratios

Payment of dividend is essential to the companies to share the wealth with the shareholders. Hence many companies desire to pay high dividend to the members to attract prospective investors.  The dividends can be paid as interim or full dividend. Generally the final dividend will be declared at Annual General Meeting of the company.  The investors evaluate the company through the strategy of dividend payout ratio. Companies with high ratio indiates the large amount of money returned to the shareholders.

The dividend payout ratio allows the investors to assess the financial strength of the company. In this technique, the investor will take the figure of dividend per share and is divided with earning per share. The earnings per share are the returns of the investment made by shareholders. If the dividend payout ratio is high, the company said to be financially strong.  On the other hand low dividend pay out ratio companies must have extra cash to prepare hard times. The technique of dividend payout ratio is an important financial metric.

The investors who desire to make investment in the company will expect returns on the investment. Therefore, the investors seek higher dividend payout ratio as the returns on the investment will be only in the shape of payment of dividends. Matured companies tend to maintain the higher payout ratio. The payout ratio is a percentage of company’s earnings which are paid to shareholders in the shape of dividends.  The DPR is calculated by using following formula

Dividend Payout Ratio = Annual Dividend/Earnings per share  X 100

If a company a Dividend Payout Ratio i.e. DPR of 60% will mean that the company is able to pay 60% of its earnings to the shareholders.  Consequently, the remaining 40% of the total income will be retained by the company. Hence the investors like to purchase such stocks whose DPR is between 60% to 70% and anticipates future growth besides increase in dividend.  However if the company has more than 100% of DPR indicates that the company must borrow the excess amount or dividend should be cut to 100%.

The dividend payout ratios vary by industry to industry. High dividend payout ratio companies indicate blue-chip as they pay higher dividends. Normally such company’s stock price is temporarily depressed during the declaration of high dividend payout ratio. The higher dividend payouts will lead to higher earnings growth.  The companies should also ensure continuous growth besides higher dividend payout ratio.