The dividend payout ratio indicates how much percentage of net profit is distributed to shareholders as dividends.
Dividend Payout Ratio = Total Dividends / Net Profit
If the company ABC is making a profit of Rs 100 Cr and gives Rs 20 Cr has dividends, then the dividend payout ratio is 20% (Rs 20 Cr / Rs 100 Cr)
How to Use Practically
The dividend payout ratio is one of the important metrics to determine the intention and attitude of management towards minority shareholders.
If the management is not willing to share the profit with shareholders it shows the negative intention of the promoter.
But we have to look at whether the business is capital intensive business or not. Generally capital intensive business doesn’t have high dividend payout because they need more cash to be redeployed in their business itself.
Look for steady dividends payout paying history for the company. Investors love steady dividend-paying companies.