Lessons On Corporate Dividend Payout And Retention Ratio

As you study different companies, they generally fall into one of two styles: growth or value. Companies are also sometimes referred to as “Dividend & Income Stocks” or “Growth Stocks”. Growth companies have strong earnings potential; therefore, they’re typically higher-priced companies. Because they focus on growth, they tend to retain more of their earnings than value companies. This allows reinvesting the profits back into the business to promote growth with the goal of increasing the stock price.

The Dividend Payout Ratio is a calculation used to measure the percentage of a company’s net income that is paid to shareholders as dividends; whereas the Retention Ratio is a measure that determines the portion of earnings that are reinvested back into the business. The risk of investing in stocks can be reduced by implementing a portfolio that contains both stocks with high dividend payout ratios (dividend stocks) and companies with high retention ratios (growth stocks). By adding diverse industries and international investments, investors can further protect themselves and their portfolios to an even greater extent.

Source: Investopedia

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