Companies will often reward their shareholders with dividends, i.e. they will pay them with additional shares. This has the benefit of incentivizing stock owners without making a dent in the company's cash balance. Dividends per share most often represent share portions, e.g. six percent or 0.06 of a share for every share owned. These dividends are distributed free of taxation unless or until the owner sells the stock.
In fact, some dividend conveyances are conditioned on a holding period, which is a span of time that must elapse before any sale can be conducted. The value of this dividend is clearer when measured against the cash retained by the company. Dividends are subtracted on the income statement as a business expense.
Determining Dividend Payout Ratio
If you want to calculate a dividend payment, it’s simple. The dividend payout ratio is the relationship between the total value of payouts in dividends and the net income enjoyed by the company. It is, therefore, the percentage of total earnings paid to the stockholders. What is preserved by the company can go toward the shrinking of debt, toward operational improvements or held as reserves.
This ratio, of course, varies from company to company. Relatively new corporations, for example, may pay no dividends at all as they roll all their income back into expansion, development and marketing.
So, the dividend payout ratio is calculated by dividing the total dividend distribution by the company's net income. Another way to calculate a dividend payment is to utilize the retention ratio where you first subtract the dividends per share from the earnings per share, and then divide the difference by the earnings per share. Then, subtracting the retention ratio from one leaves the payout ratio.
Locating Important Figures for Calculation
These figures are useful in calculating dividend value and evaluating total expenses. So, where do you locate the factors for these formulas?
A corporation's revenue and expenses appear on its income statement, usually appended to or appearing within its annual report to stockholders. This document can be mailed from headquarters or downloaded from the company's website. The net income is derived from subtracting the total expenses from the total income.
With the payout ratio in hand, using 0.06 as in the example discussed, a net income of, say, $150,000 multiplied by six percent leaves a dividend payout of $9,000. Using the income statement to find the number of outstanding shares, a shareholder can divide the $9,000 by 75,000 shares, for instance, to see that each share will pay 12 cents in dividend value. By knowing how to calculate a dividend payment, you can easily determine if the investment is a good one.
Face Value vs. Market Value
There is some question about whether dividends are paid according to the face value of the stock or its market value. Face value refers to the original cost an investor paid for the security as reflected on the stock certificate. Market value, on the other hand, is the product of the current price of one share and the total number of outstanding shares.
As mentioned earlier, the directors of a company decide on the size of a dividend and whether any will be paid out at all. More often than not, directors will look at the number of shares eligible for dividend payment rather than any value calculation when considering the size of the dividend.
Do Dividends Have a Downside?
As additional returns on investment, dividends are always a plus for shareholders. Still, the long-term survivability and success of a company hinge on the continual re-investment of financial resources. Younger business concerns should be conservative in any decision to issue dividends, and in fact, many growing companies don’t offer a high ratio of dividends per share, if any.