Buying, selling, and trading aren’t the only investment opportunities stocks offer.
Stock investors can also earn passive income in the form of dividends. If you currently invest in stock or are considering this type of investment, it’s important to understand how to calculate these dividends.
These calculations can help you compare your stock options and estimate how much you can anticipate in dividend payouts.
What Are Dividends?
Dividends are the allocation of a company’s profits to its shareholders. Typically, companies issue dividends on a quarterly basis and only after the finalization of income statements for that quarter. The amount of each quarterly dividend is set at the discretion of the company’s Board of Directors. Companies can pay out cash dividends or shares of stock, known as a dividend reinvestment plan (DRIP).
Investors with concerns about the tax efficiency of this type of passive income should consider purchasing qualified dividends. This type of dividend is taxed the same as long-term capital gains, which range from 0% and 20%, compared to ordinary dividends, which have a tax rate between 10% and 37%. It is important to remember that not all stocks issue dividends.
What Is a Dividend Payout Ratio?
The dividend payout ratio represents the percent of the company’s net income it pays out to its shareholders. Some companies pay out 100% of its net income, while others choose to use a portion to reinvest in the company and payoff debts.
You can calculate the dividend payout ratio using the following formula.
(annual dividend payments / annual net earnings) * 100 = dividend payout ratio
For instance, if a company’s annual net earnings are $5M and its total annual dividend payments equal $3M, the dividend payout ratio is 60%.
(3M / 5M) * 100 = 60%
How Do You Calculate Dividends on a Balance Sheet?
If a company does not publicly announce its dividend amount, there is another way to calculate dividends using the company’s financial statements. To make this calculation, you need to use the company’s balance sheet and income statement, which you can find in its annual 10-K filings.
Using these financial statements to calculate dividends requires a two-step approach.
1. Calculate Retained Earnings
You can calculate retained earnings by subtracting the company’s retained earnings from the beginning of the period from year-end retained earnings.
year-end retained earnings – retained earnings at the start of year = net retained earnings
For example, if the company’s retained earnings at the beginning of the year are $5M and year-end retained earnings are $10M, the net retained earnings are $5M.
$10M – $5M = $5M retained earnings
2. Calculate Dividends
Then, you can use this figure to calculate dividends using the dividend payout ratio formula. Continuing with the same example for a company with annual earnings of $10M, the dividend ratio is 50%.
($5M / $10M) * 100 = 50%
How to Calculate Dividends Per Share (DPS)
Dividends per share (DPS) represents the amount of dividend payout for each share. Calculating the DPS allows investors to determine how much they can expect to receive. Investors can use the following formula to determine the DPS.
total amount of dividend paid during the period / shares outstanding = dividends per share
For instance, a company pays out $1M in dividends to 4M shareholders. The dividend per share amount is $0.25.
$1M / 4M shares = $0.25 per share
How to Calculate Preferred Dividends
There are two types of stocks, preferred stock and common stock. As its name implies, preferred stock has several advantages over common stock. For instance, investors with preferred stock typically have voting rights, receive a higher dividend payout, and their stock payout takes precedence over common stock payouts.
To calculate preferred dividends, you must first determine the dividend percentage and the par value for the preferred stock. You can find this information on the preferred stock prospectus. Then, use the following formula:
(dividend rate / 100) * par value for the preferred stock = annual preferred dividends
For example, let’s say you purchase 100 shares of preferred stock. This stock has a par value of $35 and a dividend percentage of 5.5%. The annual preferred dividend per share is $1.92. To find the quarterly preferred dividend, you can divide this number by 4, which equates to $0.48 per share. With 100 shares, you can expect to earn $48 per quarter ($0.48 * 100).
(5.5 / 100) * $35 = $1.92 per stock (annually)
$1.92 / 4 = $0.48 per stock (quarterly)
$0.48 * 100 = $48 quarterly payout
How to Calculate Dividends Paid
When comparing stocks for investing, it’s common practice to see how many and which companies pay out in dividends. Some companies announce this information publicly, but you can also calculate this amount by pulling information from the company’s financial statements with its 10-K filings.
Start by calculating the company’s net retained earnings for the year using the following formula.
year-end retained earnings – retained earnings at the start of year = net retained earnings
Then, subtract this number from the company’s annual net profits.
annual net profits – net retained earnings = total dividends paid (annually)
For instance, a company with annual profits of $2M and retaining earnings at the beginning of the period of $3M and retaining earnings at the end of the period of $4M, has an annual dividend payout of $1M.
$4M – $3M = $1M net retained earnings
$2M – $1M = $1M annual dividends paid
How to Calculate Cash Dividends
Cash dividends are the amount companies pay out of their annual profits to their stockholders. Some companies announce their total cash dividends amount publicly. However, this amount is easy to calculate using the following formula.
dividends paid per share * number of shares = total cash dividends
For example, if a company pays out $0.75 per share and has 20,000 shares, its cash dividend payout is $15,000
$0.75 * 20,000 shares = $15,000 cash dividends payout
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