The dividend payout ratio measures the proportion of earnings available to common shareholders that is distributed as common dividends.

The calculation is:

Dividend payout ratio = Common dividends ÷ Net income available to common shareholders

Substituting the figures:

$360,000 ÷ $1,200,000 = 0.30, or 30%

Option B is correct.

The company distributes 30% of its earnings and retains 70% within the business. The retention rate can be calculated as:

100% − 30% = 70%

Option D therefore represents the retention rate rather than the dividend payout ratio.

A higher payout can appeal to income-oriented investors but leaves less internally generated capital for expansion, debt reduction or other corporate purposes. A lower payout may support growth but provides less current income. The appropriate level depends on the issuer’s industry, maturity, cash-flow stability, investment opportunities and capital requirements.

The ratio should be calculated using sustainable earnings and dividends applicable to common shareholders. One-time gains or irregular special dividends may distort interpretation. Analysts should also assess cash flow because accounting earnings do not necessarily equal cash available for dividends.

The CIRO Retail Securities syllabus specifically identifies dividend payout, retention rate, earnings per share, book value per share and free cash flow to equity as core equity-analysis ratios.

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