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Payout ratio calculator

The payout ratio is dividends divided by net income. On $18,000 of dividends and $45,000 of net income it is 40 percent. Retention is 60 percent. Times 15 percent ROE on $300,000 of equity, sustainable growth is 9 percent.

Payout ratio

40.00%

Retention 60.00%. Sustainable growth 9.00% on 15.00% ROE.

Net income
$45,000
Dividends
$18,000
Book equity
$300,000
Payout
40.00%
Retention
60.00%
ROE
15.00%
Sustainable growth
9.00%
$

Profit after interest and tax. Same dollars as the equity line.

$

Cash paid to ordinary shareholders this period, not the yield on the share price.

$

Shareholders' equity, not market cap. Sustainable growth uses ROE on this book.

On this page

The formula

payout=DNIg=ROE×(1−payout)\text{payout} = \frac{D}{\text{NI}} \qquad g = \text{ROE} \times (1 - \text{payout})

D is ordinary dividends. NI is net income. ROE is NI over book equity. g is the sustainable growth rate if those ratios stay put.

What left the firm, and what book equity can grow at

Payout is the share of residual profit sent as cash:

payout=DividendsNet income\text{payout} = \frac{\text{Dividends}}{\text{Net income}}

On $18,000 of dividends against $45,000 of net income that is 40 percent. Retention is 1−0.40=0.601 - 0.40 = 0.60, 60 percent. Book equity is $300,000, so ROE is 15 percent. Sustainable growth is 0.15×0.60=0.090.15 \times 0.60 = 0.09, 9 percent.

Those profit and equity dollars are the first DuPont sheet. The $18,000 of dividends is new on this page.

The calculator on this page prints payout, retention, ROE and gg. How the payout ratio works owns the 40 percent. How sustainable growth works owns the 9 percent.

Pay nothing, keep the whole residual

Net income $60,000, dividends $0, equity $600,000. Payout is 0. Retention is 100 percent. ROE is 10 percent. gg is 10 percent.

That is the less-borrowed DuPont sheet. A zero payout does not make growth equal ROE unless retention is 100 percent, which it is here.

Half paid out on a 20 percent ROE

Net income $80,000, dividends $40,000, equity $400,000. Payout is 50 percent. Retention is 50 percent. ROE is 20 percent. gg is 10 percent.

The 10 percent matched the second sheet's gg for a different reason: half the 20 percent ROE, not all of a 10 percent ROE. Payout against dividend yield is cash over profit against cash over price. Yield needs a share price this page does not take.

What this page is not doing

It is not a dividend yield, not a Gordon growth price, and not a forecast that payout stays at 40 percent. The three sheets are 40 percent payout and 9 percent gg, 0 percent payout and 10 percent gg, and 50 percent payout and 10 percent gg. This is educational material, not financial advice.

Worked examples

40 percent payout, 9 percent growth

Net income is $45,000, dividends $18,000, book equity $300,000. What is payout, and what is sustainable growth?

  1. Payout: 18000/45000=0.4018000 / 45000 = 0.40, 40 percent.
  2. Retention: 100−40=60100 - 40 = 60 percent.
  3. ROE: 45000/300000=0.1545000 / 300000 = 0.15, 15 percent.
  4. Sustainable growth: 15×0.60=915 \times 0.60 = 9 percent.

Payout is 40 percent. Retention is 60 percent. ROE is 15 percent. Sustainable growth is 9 percent.

Zero payout on the less-borrowed sheet

Net income $60,000, dividends $0, equity $600,000. What is gg?

  1. Payout is 0 percent. Retention is 100 percent.
  2. ROE: 60000/600000=0.1060000 / 600000 = 0.10, 10 percent.
  3. Sustainable growth: 10×1=1010 \times 1 = 10 percent.

Payout is 0 percent. Retention is 100 percent. ROE is 10 percent. Sustainable growth is 10 percent.

Half paid out on 20 percent ROE

Net income $80,000, dividends $40,000, equity $400,000. What is gg?

  1. Payout: 40000/80000=0.5040000 / 80000 = 0.50, 50 percent.
  2. Retention is 50 percent.
  3. ROE: 80000/400000=0.2080000 / 400000 = 0.20, 20 percent.
  4. Sustainable growth: 20×0.50=1020 \times 0.50 = 10 percent.

Payout is 50 percent. Retention is 50 percent. ROE is 20 percent. Sustainable growth is 10 percent.

The mistake that costs the most

Treating payout as dividend yield.

Payout is dividends over net income. Yield is dividends over price. A firm can pay 40 percent of earnings and still yield 1 percent if the price is rich, or yield 8 percent if the price collapsed. How dividend yield works needs a price this calculator does not take.

The other error is feeding a market-value ROE into gg. Sustainable growth uses book ROE, because book equity is what retained earnings actually add to.

Common questions

Can payout exceed 100 percent?

Yes, if dividends exceed net income. Retention then goes negative and gg goes negative: the book is shrinking. Type the two lines your sheet actually paid and earned.

Is 9 percent a forecast of EPS growth?

It is ROE times retention if those ratios stay put. PEG's growth input is a different object: an expected EPS growth rate, not this identity.

Which equity?

Book equity. The first sheet is the DuPont $300,000, not the ROE calculator's million-dollar teaching book.

Keep reading

This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.