Dividends are an excellent way to generate income from owning stocks. Reinvesting dividends allows you to quickly accumulate stock or to enjoy higher levels of compounded interest. You might be wondering how companies determine how much to pay in dividends to shareholders and how to calculate the dividend paid formula.
What Are Dividends?
A dividend is an incentive to encourage investors to purchase stock shares. It is a decision by the board of directors to give some of the corporate profits back to investors. If you are a shareholder, you can receive a portion of these profits as long as you owned the stock by the ex-dividend date. Sometimes, this is in the form of a cash payment or additional stock.
Companies that do not pay dividends often reinvest the money that could have been paid in dividends back into the company.
Read More: Advantages & Disadvantages of Paying Cash Dividends
How Are Dividends Calculated?
How is the dividend received by each shareholder calculated? The profits that are allotted to be given back to shareholders are set aside and divided into a certain portion per share. The amount each person receives depends on the number of stocks in the company they own. Owning more shares means that you will get a larger portion of the company's profits.
What Is the Dividend Paid Formula?
Most companies and investment platforms will provide information about the company, including the dividends paid in the past, ex-dividend date and other important information that investors want to know. There might be times when you want to know the total amount that was paid out by the company in dividends and track its growth or decline before you make an investing decision.
The obtain this number, you first have to find the balance sheet. You will need to locate the retained earnings and net profit.
Dividend Paid Formula
The dividend paid formula is:
Dividends = Net profit - (Beginning Retained Earnings – ending retained earnings)
The net change in retained earnings represents the retained earnings from that reporting period. If the change in retained earnings matches the net profit, no dividend was paid in that period. If the change in retained earnings is less than the net profits, then that is the amount the company paid out during that reporting period.
You can find out how much was paid for each share of the company by dividing the total amount of dividends that were paid by the number of outstanding shares, which can also be found on the balance sheet.
Read More: What Does It Mean if a Stock Doesn't Pay Dividends?
How Are Dividends Paid?
Let’s see an example. If a business reports a $100,000 change in retained earnings for the quarter and a net profit of $180,000 in that same reporting period, the entire $180,000 should have been reported as retained earnings. Since it was not, then the $80,000 difference more than likely went out in the form of dividends to shareholders.
Now, you can find the shares outstanding. If the company had 1,000,000 shares outstanding, each share received $0.08. If you owned, 10,000 shares of the company, the company would pay you $800 just for owning the stock. Owning 100 shares would have given you $8.
Stocks are the most common asset people think of when they think of dividends, but some mutual funds and exchange-traded funds (ETFs) also pay dividends to investors. Many times, when companies pay dividends or increase the amount paid in dividends, it is accompanied by an increase in stock price, too. This is an even better deal for investors. As you can see, investing in dividend stocks is an excellent way to earn even more from your investment instruments and an excellent way to grow your wealth.
Read More: How Often Are Stock Dividends Paid Out?
Adam Luehrs is a writer during the day and a voracious reader at night. He focuses mostly on finance writing and has a passion for real estate, credit card deals, and investing.