5% of the share price, 40% of annual earnings
Take a fictional company with one million common shares, its general ownership shares, throughout a completed financial year. Each costs ₩20,000 on the comparison date. The company has ₩2.5 billion of profit left after expenses and tax for these owners. This is their net income. It pays a regular cash dividend of ₩1,000 per share for that year, all paid within the same year.
Dividend yield compares the annual cash paid on one share with that share’s chosen price. The payout ratio compares the total annual cash dividend with the same owners’ annual net income. The first asks about the payment relative to a share price. The second asks how much of the company’s profit was distributed. The amount divided by is the denominator; here it changes from price to profit. Neither ratio by itself includes the money gained or lost as the share price changes.
Total cash dividends are ₩1,000 × 1,000,000 = ₩1,000,000,000. Earnings per share, or EPS, are ₩2,500,000,000 ÷ 1,000,000 = ₩2,500. This model has no preferred shares with different rights, treasury shares held by the company itself, changes in share count or other claims to adjust for.
On a narrow screen, scroll the tables sideways to see every column.
| Measure | Calculation | Result |
|---|---|---|
| Dividend yield | Annual dividend per share ÷ share price: 1,000 ÷ 20,000 | 5% |
| Dividend payout ratio | Annual common cash dividends ÷ common net income: 1,000,000,000 ÷ 2,500,000,000 | 40% |
Here, dividing the ₩1,000 dividend per share by ₩2,500 EPS also gives 40%, because the share counts and periods match. The result says that the year's dividend equals 40% of that year's earnings. It does not mean you earn 40% on the amount you invested.
A falling price changes yield; falling earnings change payout ratio
Keep the annual payment at ₩1,000 per share and the one million shares fixed. Halve only the price and the same payment becomes a larger percentage of that price. Halve only company profit and the payment takes a larger share of the profit instead. Each row below is an independent case, not a sequence of years.
| Case | Share price | Annual common net income | EPS | Dividend per share | Total dividend | Yield | Payout ratio |
|---|---|---|---|---|---|---|---|
| Base case | ₩20,000 | ₩2,500,000,000 | ₩2,500 | ₩1,000 | ₩1,000,000,000 | 5% | 40% |
| Half the price | ₩10,000 | ₩2,500,000,000 | ₩2,500 | ₩1,000 | ₩1,000,000,000 | 10% | 40% |
| Half the earnings | ₩20,000 | ₩1,250,000,000 | ₩1,250 | ₩1,000 | ₩1,000,000,000 | 5% | 80% |
| Half the price and earnings | ₩10,000 | ₩1,250,000,000 | ₩1,250 | ₩1,000 | ₩1,000,000,000 | 10% | 80% |
The table’s 10% yield can sit beside a 40% or an 80% payout ratio. To distinguish those situations you need the company’s earnings, not just the share price. A lower price can reflect expectations of weaker profit or a future dividend cut, but the yield itself cannot establish why investors are paying less. It simply divides the selected payment by the selected price.
The earnings figure matters just as much. A large gain on an asset sale can make one year's payout ratio look unusually low. The profit definition therefore matters when assessing how much room a company has to raise its dividend. Our revenue, operating profit and net income guide traces the differences between those income measures.
Separating ordinary and special dividends
Return to the ₩20,000 price and ₩2.5 billion annual profit. The regular, or ordinary, dividend is ₩1,000 per share. Add a separately assumed special cash payment of ₩2,000 per share and the year’s actual dividend becomes ₩3,000 per share, or ₩3 billion for all shares. A special dividend is an extra payment to distinguish from the regular component, rather than a promise that it will recur.
| Dividend included | Annual amount per share | Total cash dividend | Yield at ₩20,000 | Payout ratio |
|---|---|---|---|---|
| Ordinary component only | ₩1,000 | ₩1,000,000,000 | 5% | 40% |
| Ordinary plus special | ₩3,000 | ₩3,000,000,000 | 15% | 120% |
The 15% describes the selected year's payments relative to that price. It is not a forecast. Even the ordinary-only 5% is a historical reference, not a promise that the company will pay ₩1,000 again.
A 120% payout ratio means those annual dividends exceed that year's earnings. It does not identify the source of the cash or, by itself, establish whether the payment is legally permitted.
The company may have cash saved in earlier years or money from borrowing or other transactions. Find that source before assuming the payment came entirely from this year’s profit. One special distribution and a recurring payment that repeatedly exceeds earnings need different explanations.
A 10% quoted yield does not change what you originally paid
Now follow an owner who buys 100 shares at ₩20,000 each, paying ₩2,000,000. Each share receives the ordinary annual ₩1,000 dividend, so the cash received is ₩100,000 gross, meaning before tax. Assume no trades, fees or reinvestment of that cash. Then let the share price fall to ₩10,000. The following table compares the same payment with the amount originally paid and the lower current value.
| Basis | Price per share | Shares | Holding value or cost | Annual cash dividend | Dividend ÷ value or cost |
|---|---|---|---|---|---|
| Original purchase cost | ₩20,000 | 100 | ₩2,000,000 | ₩100,000 | 5% |
| At the ₩10,000 comparison price | ₩10,000 | 100 | ₩1,000,000 | ₩100,000 | 10% |
The same ₩100,000 is 5% of the original cost and 10% of the lower value now assigned to the shares. The larger quoted yield arises because the price fell, not because this owner received more cash. To measure the owner’s result, the loss of share value must also be included. That loss does not disappear when a dividend arrives.
An investment result combines the current share value with cash received over the same period, then compares them with money paid in. The ETF distributions guide gives a fund example of that calculation. Here we are dealing with cash dividends on common shares. A fund has its own distribution policy and a net asset value—the assets it holds less what it owes—which is a different setting.
Zero earnings are not a 0% payout ratio
Keep the ₩1 billion annual common cash dividend, but replace the earnings figure. With zero earnings, division by zero is undefined. With a loss, the arithmetic produces a negative percentage that cannot be read as a normal share of positive earnings paid out.
| Earnings case | Annual common net income | Payout ratio shown here |
|---|---|---|
| Break-even | ₩0 | Not meaningful: zero earnings |
| Loss-making year | −₩500,000,000 | Not meaningful: loss |
| Earnings not available | Unavailable | Cannot calculate |
A dash on a data screen may mean a loss, missing figures or a calculation convention. It need not mean no dividend. An unavailable earnings figure leaves the ratio uncalculated until the accounts supply it. Substituting zero would describe a different situation.
Dates, earnings scope and available cash
A trailing yield uses dividends from a past period. An expected yield uses an estimate or announced future payment. Annualising the latest quarterly payment means scaling it up to a yearly amount, which assumes something about the remaining payments. Two quoted percentages are comparable only when their labels, price dates and dividend periods are understood.
The dividend recipients and the owners entitled to the profit must match. For a group of companies, total profit can include money belonging to outside owners of subsidiaries; the parent’s ordinary shareholders may own only part of that profit. Also check whether the profit is the reported amount or an adjusted amount that leaves out selected items. Those choices change the payout ratio.
Real companies can issue or buy back shares, or have preferred shares with different rights. EPS may also use a share count averaged across the year, allowing for how long each share was outstanding. Those differences can stop a quick per-share division from matching the total-dividend calculation. The fixed share count in this example avoids those complications. For an actual company, check the share counts and earnings basis behind both calculations.
A profitable company can still be waiting for customers to pay. Meanwhile, loan repayments and new equipment use cash. A cash flow statement follows actual money in and out; an income statement records sales and expenses for the period. Read both, with the payment schedule and dividend explanation, to see when cash could be available. The profit and cash flow example follows that difference through a month.
Several periods help distinguish a consistently high payout, a one-off special dividend and a temporary profit decline. Each needs its own explanation. If you also compare valuation ratios, the P/E, P/B and ROE guide explains why a lower price alone does not establish a bargain.
Preferred shares can give their owners priority for certain payments, but the exact terms decide which payments and how much. They can also have different voting rights or rights to what remains when a company closes after settling its bills. Those differences matter before comparing yields. Our common vs preferred stock guide traces the allocations under stated conditions.
About the examples
The company, share prices, earnings, dividends, holding and five tables are fictional. Both languages use the same Korean-won figures. Each example uses one completed annual period, with that year’s common cash dividends paid within it. There are one million common shares throughout, and earnings are attributable to those common shareholders.
Preferred shares, treasury shares, stock dividends, share-count changes, taxes, fees, reinvestment and trading are excluded. The price, earnings and special-dividend cases are separate alternatives to the baseline. These examples neither forecast a dividend nor determine a company’s legal capacity to pay it. See our editorial policy.