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Payout ratio vs retention ratio

Payout and retention split one year's profit. On $18,000 of dividends and $45,000 of net income, payout is 40 percent and retention is 60 percent. They add to 100. Same DuPont sheet, two writings of one residual.

 Payout ratioRetention ratio
FormulaDividends / net income.b=1b = 1 minus payout, or (net income minus dividends) / net income.
Teaching sheet$18,000 over $45,000 is 40 percent. ROE is 15 percent on $300,000 of equity.60 percent kept. Same three lines. They add to 100.
They add to 10040 percent paid.60 percent kept. 40+60=10040 + 60 = 100 on this residual, always.
Zero cash paid$0 of dividends on $60,000 of profit is a 0 percent payout.Retention is 100 percent. b=1b = 1. They still add to 100.
What it weightsThe cash that left. Silent on how much of ROE can fund assets.The bb in g=ROE×bg = \text{ROE} \times b. Fifteen percent times 60 percent is 9 percent.
What it is notA yield. Cash over profit is not cash over price.A forecast. The 60 percent repeats if payout, margin and the equity multiplier stay put.
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Next on Models and deals

Sustainable growth

One residual, two writings

Payout and retention are complements on one sheet. They are not two firms.

Payout=DividendsNet income,b=1−payout\text{Payout} = \frac{\text{Dividends}}{\text{Net income}}, \quad b = 1 - \text{payout}

On $18,000 of dividends against $45,000 of net income, payout is 40 percent and bb is 60 percent. 40+60=10040 + 60 = 100. Return on equity on $300,000 of book equity is 15 percent. Then g=0.15×0.60=0.09g = 0.15 \times 0.60 = 0.09, 9 percent.

How the payout ratio works owns the 40 percent. How the retention ratio works owns the 60 percent. How sustainable growth works owns the 9 percent. How DuPont analysis works is the ROE split sitting behind that 15 percent.

The 40 against 60 is this residual, not a second company.

Zero paid is still a split

Net income $60,000, dividends $0, equity $600,000. Payout is 0 percent. Retention is 100 percent. They add to 100. ROE is 10 percent. With b=1b = 1, sustainable growth equals ROE.

Paying nothing is a payout of zero and a retention of one, not a missing pair. The identity b=1b = 1 minus payout does not need a positive dividend.

The 9 percent on the first sheet, and the 10 percent on this second sheet, hold if payout, margin and the equity multiplier stay put. That is a teaching condition, not a forecast. This is educational material, not financial advice.

Worked examples

40 percent against 60 percent on the DuPont residual

Net income is $45,000, dividends are $18,000, and book equity is $300,000. What are payout and retention?

  1. Payout: 18000/45000=0.418000 / 45000 = 0.4, which is 40 percent.
  2. Retention is 60 percent, because 100−40=60100 - 40 = 60.
  3. They add to 100.
  4. ROE: 45000/300000=0.1545000 / 300000 = 0.15, which is 15 percent.
  5. Sustainable growth is 9 percent.

Payout is 40 percent. Retention is 60 percent. They add to 100. ROE is 15 percent. Sustainable growth is 9 percent. Net income is $45,000, dividends $18,000, equity $300,000.

Zero paid, 100 percent kept

Net income is $60,000, dividends are $0, equity is $600,000. What are payout and retention?

  1. Payout: 0/60000=00 / 60000 = 0, which is 0 percent.
  2. Retention is 100 percent.
  3. They add to 100.
  4. ROE: 60000/600000=0.160000 / 600000 = 0.1, which is 10 percent.
  5. Sustainable growth is 10 percent, equal to ROE because retention is 100 percent.

Payout is 0 percent. Retention is 100 percent. They add to 100. ROE is 10 percent. Sustainable growth is 10 percent. Net income is $60,000, dividends $0, equity $600,000.

Common questions

Do payout and retention always add to 100?

Yes, on the same residual. Forty plus 60 is 100 on the first sheet. Zero plus 100 is 100 when dividends are $0. A payout above 100 percent makes retention negative. That is still the same identity.

Which one should I quote?

Quote the one that matches the question. Cash sent is payout. The bb in g=ROE×bg = \text{ROE} \times b is retention. On this sheet they are 40 percent and 60 percent of the same $45,000.

Is a higher retention better?

It is a larger kept share, not a grade. The 60 percent funds the 9 percent g only if payout, margin and the equity multiplier stay put. A different ROE on a different b can print a similar g.

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.