The investor’s returns on stock consist of two components. The first is price growth. The second is regular payments to shareholders. A person can live on this passive income or choose reinvesting profits to increase their capital.
Dividend calculations can be done in several ways. It is essential to understand these methods to better grasp the investment opportunities provided by the chosen company.
In this article, we will explain how to calculate stock dividends using different methods. Most often, financial statements of the company (balance sheet and income statement) are used for this purpose.
Table of Contents
How do you calculate dividends on a balance sheet?
Most companies publish information about allowances in the cash flow statement or a stand alone press release. However, if this does not happen, an investor can independently find out the amount of payments.
For this, corporate filings are needed, specifically the balance sheet and the income statement of the company. All companies publish these annually as part of their 10-K filings.
To calculate the dividend payout based on financial statements, you need to follow two simple steps.
1. Calculate retained earnings
The first step is to calculate retained earnings. This figure can be determined using the following calculation formula:
NRE = RE1 – RE2
NRE is the net retained earnings accumulated during the year. RE1 is the year end retained earnings for which the shareholder compensation needs to be determined. RE2 is the retained earnings at the beginning period.
For example:
- retained earnings at the beginning of the year (RE1) – $2 million;
- retained earnings at the end of the year (RE2) – $8 million.
Then the desired amount is $6 million ($8 million – $2 million).
2. Calculate dividends
Let’s examine how to calculate dividend income generated by the company. The calculations are simplified if the dividend payout ratio is known. It helps to understand what portion of the earnings is received by shareholders compared to the share that remains retained.
Here is a calculation example based on the following initial conditions:
- the company’s annual earnings amount to $10 million;
- the dividend ratio – 40%.
Then the total compensation to shareholders will be $4 million ($10 million x 40%).
If the payout ratio is unknown, it will be necessary to use the figure found in the previous section (NRE). This amount needs to be subtracted from the company’s annual earnings. The difference between these figures will be the total amount directed to the shareholders.
TD = NI – NRE
In our example, the net income (NI) is $10 million. Of this amount, the share of net retained earnings (NRE) is $6 million. Therefore, the company’s total compensation to shareholders (TD) will be $4 million ($10 million – $6 million).
How to calculate dividends per share (DPS)
Dividend payout per share (DPS) is one of the key criteria for an investor to any company. Based on this, they can plan for generating income of a certain amount. Dividends per-share calculation is done using the following formula for dividends:
DPS = total dividends / shares outstanding
Let’s assume the company from our example issued a total of 5 million shares. Out of these, 1 million are treasury shares. There are no allowances for such securities. This means that the total earnings are distributed only among 4 million shares.
The per-share calculation is as follows:
DPS = $4 million / 4 million shares = $1 per share.
Dividend Per Share Example
Let’s revisit how to calculate dividend payout per share. Here is an example calculation and practical application based on data from the Coca-Cola company.
According to reuters.com:
- The company’s retained earnings at the beginning of 2024 were $73.782 billion. At the end of 2024, they were $76.054 billion.
- The net earnings for 2024 was $10.631 billion.
- The number of shares outstanding was 4.302 billion.
First step: find the change in retained earnings – $2.272 billion.
Second step: find the total dividend – $8.359 billion.
Third step: divide the total income of all shareholders by the number of outstanding shares – $1.94 per share.
Calculating DPS from the Income Statement
There is another answer to the question of how to calculate a stock dividend. This approach is suitable for companies with a stable payout ratio. For the calculations, you will need to know:
- Net income (which can be found in the income statement).
- The number of shares outstanding (treasury shares do not participate in the distribution of dividends).
- Payout ratio.
Using the first two components of the dividend formula, you can find Earnings Per Share (EPS). Knowing this figure and the payout ratio, you can calculate the DPS.
This method is convenient for making forecasts of shareholder income in future years. The initial information uses analysts’ forecasts for the company’s earnings.
Below is a detailed explanation of how to find dividends.
1. Figure out the net income of the company
Financially healthy companies pay dividends to shareholders from their net income. Therefore, the final data on earnings is the main basis for calculating DPS.
This information is often found in the income statement in the bottom line. However, some companies present the information in a different order.
2. Determine the number of shares outstanding
An important parameter of the dividends formula is the shares outstanding. Companies provide this information in the income statement as well as in the balance sheet.
When it comes to calculating dividends paid per share, it is important not to confuse issued shares with shares outstanding. Dividends do not apply to treasury shares.
3. Divide net income by the number of shares outstanding
The next step in the instructions on how to calculate dividend payout is to determine the earnings per share (EPS). It is from this amount that dividends are paid. Although in some cases, companies use retained earnings or even borrowed funds.
Earnings per share is found by division net income (NI) per share outstanding (SO). The formula to EPS calculation is as follows:
EPS = NI / SO
For the example given above, EPS will be $2.5 ($10 million / 4 million shares).
4. Determine the company’s typical payout ratio
The next step in the instructions on how to calculate dividends is to determine the historical payout ratio. This is a major drawback of the described method; it is applicable only if there is consistency in the dividend policy.
For example, if a company has directed 38%-42% of its earnings distribution to shareholders over many years, the average payout ratio can be considered to be 40%. Alternatively, two calculations can be performed to find the minimum and maximum expected amounts.
5. Multiply the payout ratio by the net income per share to get the dividend per share
The final calculation in the DPS determination is the multiplication of the values found in the third and fourth steps. To find the dividend amount, the earnings per share basis (EPS) must be multiplied by the payout ratio.
DPS = EPS x Payout Ratio.
For the hypothetical company in our example, the average expected DPS will equal $1 ($2.5 x 40%).
How to calculate preferred dividends
The instructions above to the question “How is dividend calculated?” apply only to ordinary shares. These securities give the owner voting rights; however, the amount of dividends is not guaranteed.
In the case of preferred stock, the situation is different. The dividend percentage that they will yield is specified in the prospectus. Therefore, an investor can calculate how much income they will receive for many years in advance, even before making a purchase.
So, how do we calculate dividends for preferred stock? It only takes three steps:
- Find the dividend percentage and the par value of the stock in the prospectus.
- Multiply the found values.
- Divide the resulting number by 4 to determine the amount of each payment, if it concerns quarterly dividends.
For example, if the par value is $100 with a dividend percentage of 3%, a shareholder owning one share will receive $3 for the year. On the quarterly basis, they will receive $0.75.
A common mistake is using the stock’s current price instead of the par value. The market value of preferred stock may fluctuate, but this does not affect the absolute size of the payment to the shareholder.
How to calculate dividends paid
Sometimes, it is necessary to determine the total payout of a company. This can be done using information from the financial statements (10-K filings):
- Find the net retained earnings for the year. To do this, subtract the retained earnings at the end of the year from the retained earnings at the beginning of the year.
- Find the information regarding annual net profits.
- Calculate the difference between the second and the first figures.
Here is an example of calculating dividends that are paid:
- retained earnings at the end of the year – $3 million;
- retained earnings at the beginning of the year – $4 million;
- the company’s annual net profit – $2 million.
Therefore, the net retained earnings amounted to negative $1 million. To calculate the dividends paid, we subtract this value from the annual profit:
$2 million – (-$1 million) = $2 million + $1 million = $3 million.
Thus, the company distributed $3 million to its shareholders. Part of this amount came from this year’s earnings, while the shortfall came from retained earnings from previous years.
How to calculate cash dividends
There is another way to calculate cash dividends. To determine the total payout, you need to multiply the dividends per share (DPS) by the number of shares outstanding (SO). The formula for calculating is:
Total cash dividends = DPS x SO
For example, if the company paid $1 per share and has 4 million shares outstanding, then $4 million was distributed to stockholders from annual profits.
Article Sources
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| Brealey, R. A., Myers, S. C., & Allen, F. (2019). “Principles of Corporate Finance.” McGraw-Hill Education, 13th Edition. |
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| Ross, S. A., Westerfield, R. W., & Jaffe, J. (2018). “Corporate Finance.” McGraw-Hill Education, 12th Edition. |
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