How to Calculate Dividends

11 min readMar 24, 2023

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Is It Necessary To Calculate Dividends, And Why Even Bother?

Most companies are transparent about their dividend payments: they disclose the amounts paid to investors in financial news, cash flow statements, quarterly and annual reports. However, some investors might want to calculate dividend themselves — to better understand a company’s business, check its income statements, or compare several dividend companies and their relative returns.

In today’s article, we are going to learn what dividends are, how they are paid, how to calculate them. Next are formulae and examples of how to calculate dividends if you want to go absolutely hardcore.

What Are Dividends?

A dividend is one of the ways a company shares its profit with its stockholders. By owning dividend-paying stocks, investors can earn cash without actually selling their shares. Also, dividends are a good rule of thumb: a company that pays out dividends is more stable and mature than companies that do not pay dividends.

The most popular dividends are cash dividends, paid monthly, quarterly, or bi-annually directly to investors. Sometimes, a company can choose to pay dividends in the form of shares: investors receive additional stock in the company.

There are common and preferred dividends. In most cases, the two types of dividends differ in payment schedules: the preferred ones are tied to the preference shares and paid several days before common dividends.

An exact dividend yield is recommended, voted on and approved by the board of directors (boring big bosses in cool suits and several large-scale investors in the company) 1–4 times every year. At these regular meetings, the company’s management chooses to increase, pause, or even forego dividend payments for the next financial period. If a company’s business is doing exceptionally well, the board of directors can authorize a special dividend payment on top of the regular dividends.

Investors get more clarity on how a company pays dividends by evaluating its dividend history and dividend policy statements. Blue chip companies, dividend aristocrats and companies with wide moat stocks tend to pay stable dividends; regular increases are common and expected from them.

The figure below shows Coca-Cola’s dividend payouts for 2020–2022:

Important: public companies are not obliged to pay dividends. Willingness to distribute part of the earnings to shareholders is a sign of an established business that has fewer competitors. Typically, companies at the stage of active expansion and growth choose not to pay dividends. They prefer to spend profits on capital expenditures, buying up lesser competitors, investing their money in tech and business improvements.

Also, investors have to pay taxes on the dividend income they receive. In the US, the tax rate can be 0, 15, or 20% on qualified dividends and 10–37% on ordinary (nonqualified) dividends. Individual tax treatment may vary according to:

The country of stock issuance
The country of incorporation
Income filing status (married, single)
Household earnings
Investing history

Different countries have their own laws and tax rates regarding dividend income.

What Is Dividend Yield And How To Calculate It?

A dividend yield is the percentage of profit a company pays to its stockholders, in terms of its stock price at the end of a reporting period. For investors, dividend yield shows how much extra money they expect to make for each dollar invested. For example, an investor who owns $5,000 worth of stock with a dividend yield of 5% expects to earn $250 a year.

But stock quotes change, and dividends are paid based on the value of one share. Therefore, dividend yield is a variable that changes with time and stock performance.

Dividend yield is calculated using a simple formula:

Dividend yield = annual dividends per share / price per share

So, if a company pays $2.45 in dividends per share and the current price of one share is $35, the dividend yield is 7%. A shareholder who owns 1,000 shares of this company will receive an annual dividend yield of $2,450 (1,000 shares x $2.45 each) or $612.50 per quarter.

For example, company A decides to pay a $2 dividend per share. At the same time, the price of the company’s share at the closing date of the reporting period is $25. It means that the dividend yield of the company’s A share for the next dividend payment is 8%.

The value of this parameter can be found on many stock picking services. Dividend yield and dividend payouts for each quarter are specified in annual financial reports. But in order to compare the performance of companies that distribute dividends once a quarter and once a month, you need to calculate annual rates for both issuers.

Mature businesses tend to have lower dividend yields. For example, Coca-Cola Company had a 0.7% dividend yield in Q4 2022. Companies with higher dividend yields are less likely to have consistent payout amounts. Therefore, such a parameter as the current dividend yield cannot be the main reason to pick stocks.

It is also highly dependent on the market stage (bull run, market correction, low interest rates). If stock quotes plummet, the dividend yield of the share may experience rapid growth. And vice versa: higher interest rates can drop dividend yields.

As a result, the first step is to calculate the dividend paid and determine whether the researched company’s absolute value is increasing or whether external factors have changed.

How To Calculate Dividends Paid

When comparing the best stocks to invest in, it is quite easy to see how which companies are paying dividends. Most U.S. companies are required to disclose this information publicly, but it is absolutely OK to calculate dividends paid by sourcing the information from companies’ financial statements.

To calculate dividends paid, it is better to start by calculating the company’s net retained earnings for the year. The formula is:

Year-end retained earnings minus retained earnings at the start of the year = net retained earnings

Then subtract this number from the company’s annual net profits.

Annual net profits minus net retained earnings = total dividends paid (annually)

For example, a company with an annual profit of $2M and retained earnings at the beginning of the period of $3M and retained 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 Dividends Paid Using Net Income And Retained Earnings

To determine the amount of dividends paid, it is important to pay attention to retained earnings and an income statement. Retained earnings are the total amount of profits a company has earned throughout its history that have not been returned to shareholders in the form of dividends and/or buybacks or undistributed in the form of other investments and capital expenditures.

If necessary, this money can be sent to shareholders. This is usually done so as not to reduce the dividend yield when stock performance is weak. Information about retained earnings can often be found in the company’s balance sheet, annual reports, and press-releases. To sum up: dividend investors should keep an eye on the annual change in retained earnings.

For example, at the end of FY 2021, company A reported retained earnings of $5 million, and at the end of FY 2022, retained earnings for the same company are $8 million. Retained earnings increased by $3 million over the year because company A has not used its retained earnings to pay dividends. If the number turns out to be negative, that means that the retained earnings from previous years were partially used to pay dividends.

The second step is to look at the profit and loss statement. This will tell you the amount of net income for the year in question. Suppose, our company A reported that its net profit was $7 million in 2022. To calculate dividends paid, one has to subtract the annual change in retained earnings from net income for that year. Or, conversely, add the amount by which it decreased. In the example of company A, we have to subtract $3 million from $7 million. The final result is $4 million in dividends paid.

But it usually doesn’t take that kind of effort. Companies are required to publish reports on how much of the total dividend was paid to shareholders and what funds were used to do so. If for some reason, an investor wants to do the calculation himself, he can find all the necessary data on the company’s annual income statements.

What Is A Dividend Payout Ratio And How To Calculate It?

The dividend payout ratio (DPR) is the percentage of a company’s net income that it pays out to its shareholders. Some companies pay out 100% of their net income, while others prefer to use part of it to reinvest in the company and pay off debts.

The dividend payout ratio is one of the key indicators for a dividend investor. This figure gives a rough estimate of how sustainable dividend payouts are in times of crisis. The lower the dividend payout ratio, the better the company’s chances of avoiding a decline in dividends when earnings and/or net income decline. If a significant portion of net income is allocated to dividend payments, there is a high probability that the issuer will have to reduce dividends paid in the worst-case scenarios (economic downturn, drop in sales).

To calculate the dividend payout ratio of any company, an investor needs to know its annual income and total dividends:

Dividend payout ratio = (total dividends / annual net income) * 100

For example if the company’s annual net income is $5 million and the total annual dividend payout is $3 million, the dividend payout ratio would be 60%.

($3 MILLION / $5 MILLION) * 100 = 60%

But one cannot blindly compare the dividend payout ratios of two random companies. We need to take into account seasonal factors, type of business, management, industry, and sector differences.

Calculating Dividends Per Share

Information about the total number of shares is given in annual reports and investor presentations. Stock-picking services also provide DPS numbers for each company they cover.

The best way to find accurate information about dividends per share is to read the latest press release or the SEC statement when a company announces its next dividend. You can also seek help from an experienced online broker. Most financial statements for investors report the accurate value of the dividend per share that the company paid out last year.

If an investor wants to calculate the dividend per share, he has to divide the total payout by the number of shares outstanding.

For example, company A decided to distribute to its shareholders $1 million in the next dividend payment. At the time of reporting, company A had 500 thousand shares outstanding. Hence, the dividend per share for company A is $2.

Although the formula for calculating the dividend per share is simple, investors are still advised to consult the official data (company’s website, annual and quarterly reports). Your own calculations may turn out to be approximate. A company might change the number of shares outstanding by reissuing a certain amount of shares or announcing buybacks. It is natural for dividends per share to change on a year-to-year basis: most companies try to make their shares more appealing to investors by increasing DPS.

What Are Preferred Dividends And How To Calculate Them?

There are two most popular types of stock ownership: common shares and preferred shares. Investors who buy common and preferred shares both own a company, with minor differences (preferred shares are a combination of bonds and shares, with lower risks).

Investors holding the preferred stock of a company can expect to:

Have no voting rights
Receive constant dividend payments over fixed periods of time
Get paid after the bondholders but before the common shareholders

To calculate preferred dividends, an investor has to know the current dividend per share and the par value of the preferred share:

Preferred shares of U.S. companies are popular among investors who are looking for predictable dividend income in cash. Also, preferred dividends are required and cumulative — they are paid out even if earnings contract and the stock price drops. For example, when a company skips all dividend payments this year, it is obliged to pay double the amount of preferred dividends next year. In this case, preferred shares are viewed as bonds because they are paid in cash regardless of circumstances.

How To Calculate Cash Dividends?

Dividends paid per share multiplied by the number of shares equals total cash dividends.

Cash dividends are calculated by multiplying the amount of dividends per share paid in cash by the total number of shares outstanding.

For example, if company A has listed a dividend per share of $2 and the number of shares outstanding is 500 thousand, then company A has paid out a total of $1 million in cash. If shareholders received dividend payments every quarter, then a total of $4 million was distributed to shareholders that year.

Public companies are required to publish financial reports that inform their minority shareholders on matters of dividend payments. Even so, it is helpful to know all the formulas and how dividends can change with time. There are periods when companies dilute their share count or artificially enhance their dividend yield with several buybacks in a row. Few reports will acknowledge this upfront.

Resume

Although, in this day and age of our almighty AI gods, most investors can use sophisticated stock-picking services with all the right answers, it is OK to calculate dividends manually once in a while. By doing so, investors gain intimate knowledge of how companies breathe, celebrate their successes, hide their struggles, manipulate stock quotes, and reward loyal shareholders.

We have reviewed numerous formulas that help better understand dividend payments. Going through multiple rounds of simple calculations, an investor gets the main idea: dividends are an instrument. No more, no less. Shareholders enjoy receiving quarterly dividends in hard cash. Companies use dividends to lure investors. Somewhere in between lies the sweet spot of your dividend income or dividend growth strategy. Now go calculate your dividends and get the best bang for your buck.