According to the U.S. Securities and Exchange Commission (SEC), companies use balance sheets to show their current assets and liabilities. In addition, they display the stockholders’ equity at a given time.
As a result, annual dividends, which are company-retained earnings that are distributed to shareholders, also affect balance sheets. But the relationship between the annual dividends and balance sheets will vary, depending on whether they have been distributed.
If you are interested in understanding how a company you have invested in is performing, you may need to look at various examples of stockholders’ equity numbers. That will help you to understand how to calculate dividends from a balance sheet.
Dividends on Balance Sheets
Before dividends have been paid to shareholders, they usually have zero effect on the retained earnings or cash items on balance sheets. However, you are likely to find them included as a liability on the dividends payable accounts.
Once the company distributes them, cash dividends result in a reduction of cash and retained earnings. As a result, stock dividends change the stockholders’ equity section of the balance sheets.
How to Calculate Dividends From a Balance Sheet
Companies tend to issue information about dividends within their annual reports. However, you may not have access to these details. In that case, you could calculate dividends from a balance sheet. Below is the procedure for doing so.
- First, find the current and previous balance sheets of the company whose dividends you want to investigate. You can find them on the company website in the investor section. Alternatively, you can use the Securities and Exchange Commission (SEC)’s EDGAR search tool to find the annual (10-K) and quarterly (10-Q) reports.
- Take a look at the previous year’s retained earnings and note that amount. And then, find the current year’s net income and the current retained earnings. You can find the retained earnings under the stockholders’ equity section of the balance sheet, which is included right after the liabilities section. And at the bottom of the income statement, you will find the net income or earnings.
- According to Nasdaq, using the formula Dividends = Previous year’s retained earnings + Current year’s net income/earnings – Current year’s retained earnings, you can determine the total dividends that have been distributed to shareholders within the specified period. Bear in mind that the accounting period does not have to be a year. If you want to determine the quarterly dividends, you can look at the quarterly reports to determine the dividends paid out during that time.
Dividend Calculations Example 1
Suppose company XYZ had retained earnings of $2.25 million during the previous accounting period. During the current period, it made an additional $1 million in net earnings. However, the current balance sheet shows that its retained earnings are $2.75 million.
In that case, you can find out the dividends paid out by using the given formula above. So, dividends = ($2.25 + $1) million - $2.75 million, which equals $0.5 million. That means that company XYZ distributed $500,000 as dividends to its shareholders for the specified accounting period.
Dividend Calculations Example 2
Suppose the same company had current retained earnings of $3.25 million instead of $2.75 million, but everything else remained constant. In that case, when you calculate the dividends distributed using the given formula, your result will be zero.
What that implies is that the company did not distribute any dividends at all and that shareholders got nothing. There may be several reasons for that.
It could be that the balance sheet is quarterly and the company intends to distribute dividends once a year. For that reason, you will only notice a change in the annual balance sheet. Also, the company management may have expansion plans and the retained earnings may have been earmarked for the expansion projects in question.
Why Dividends Matter
Balance sheets offer insight into a company’s performance. If you are looking for dividend stocks, you would be wise to learn how to calculate a company’s dividends from a balance sheet and income statement. Then you can use the results to determine other metrics.
For example, you can use the dividend yield formula to calculate the dividend yield or the percentage of a company’s stock price or share price that is paid out as dividends each year. Then, based on the dividend per-share basis, you can learn whether the company you are considering investing in has a history of issuing dividend payments or not, enjoys a good cash flow, is experiencing increased profitability or has a habit of reinvesting the company’s profits.
Generally, some investments, such as real estate investment trusts, tend to pay higher-than-average annual dividends.
Other values you can determine based on dividends include dividend payout ratios, which are the reciprocal of the dividend yield, earnings per share (EPS), and dividend per share (DPS), which are the total dividends issued for all outstanding shares. Then you can determine whether a company offers good dividends and has a high dividend yield or has experienced dividend growth, so you can decide whether to invest in it or not.
