Dividends are a portion of a company's profit that is paid out to each shareholder, in addition to any gains a shareholder gets when the price of the company's stock increases.
Most companies calculate the dividends and announce them during regular disclosures with their investors or through a stand-alone press release. Companies commonly pay dividends to shareholders quarterly, though some companies pay monthly or annually.
How to calculate total dividends
The formula for calculating how much money a company is paying out in dividends is simple — subtract the net retained earnings from the annual net income.
Dividends = annual net income - net retained earnings
You can find the income and earnings from the company's balance sheet and income statement.
The balance sheet shows the company’s assets and liabilities. It also reveals the company’s retained earnings — the total company earnings that haven't been returned to its shareholders through dividends.
The income statement shows the company’s annual net earnings. It also shows how much the company has earned during a given year if they had decided not to pay any dividends.
When calculating the dividend for a given year, subtract the retained earnings at the start of the year from the year-end figure. What's left is the net change in retained earnings for that year.
So let's say a company starts the year with $10M in retained earnings, and $30M at the end. It also earns $50M in net profits for the year.
Using the formula above, here's the math:
Step 1: $30M - $10M = $20M retained earnings
Step 2: $50M annual income - $20M retained earnings = $30M paid in dividends.
Investors can take this one step further and divide the $30M by the total number of outstanding shares, also found on the balance sheet, to calculate the dividends per share.
Other ways to find a company’s total dividends include calculating the company’s dividend yield and dividend payout ratio.
What is dividend yield?
The dividend yield is the percentage amount a company pays out in relation to its stock price. For investors, the dividend yield is an indicator of how much extra money they expect to earn per dollar invested. An investor who holds $5,000 worth of stock that has a 5% dividend yield is expecting to earn $250 a year.
Stock values fluctuate, however, and dividend payouts are based on a per share value instead of a per dollar value, thus they change based on the stock’s performance.
The formula for calculating dividend yield is:
Dividend yield = annual dividends per share / price per share
Thus, if the company pays $2.45 in dividends per share and the current price per share is $35, the dividend yield is 7%.
A shareholder with 1,000 shares in that company will receive an annual payout of $2,450 (1000 shares x $2.45 each) or $612.50 per quarter.
What is the dividend payout ratio?
The dividend payout ratio (DPR) indicates the percentage of total earnings that a company paid to its shareholders as dividends.
It also shows how much money the company returns to its shareholders in contrast to the money they keep or retain.
Companies have different practices when it comes to paying out dividends. Some pay out all their earnings, while others retain a portion for paying off debts, reinvesting, or building cash reserves.
Here's the formula to calculate the dividend payout ratio:
Dividend payout ratio = dividends paid / net income
Suppose a fictitious company paid out $10M in dividends and its net income is $50M. The company’s dividend payout ratio is 20%.
$10M / $50M = 20%
In other words, for each $1 in profit, the company paid its investors $0.20.
Dividends are an excellent way to earn additional income through stock holdings. Dividends paid, the dividend yield, and the dividend payout ratio provide insight into how a company measures against its competitors.
These calculations also show how well a company is run and can help investors determine the potential return on an investment. While dividends shouldn’t be the sole reason an investor chooses a company, understanding these calculations will help them make more informed decisions.
