Cash dividends are generated by corporations and mutual funds and paid to shareholders as distributions of corporate profits. Cash dividends may be calculated and distributed on a per-share basis. They may also be issued as a total amount based on the number of shares that you own as a shareholder.
Cash dividends may also be computed and issued as the dividend yield on your total investment. Remember that dividends count as regular income and cannot be reported as capital gains on your tax returns.
Cash Dividend Per Share Formula
There is a convenient cash dividend per share formula that you can easily use to determine your per-share dividend yield. After buying stock that pays cash dividends, you as the shareholder typically receive quarterly dividend checks. For instance, if you own 2,000 shares of Company X, Inc. stock, you may be issued a quarterly dividend payout of $900.
To compute your dividend payment per share, divide your $900 payment by the total number of shares that you own. By dividing $900 by 2,000 shares, you can determine the per-share amount that you receive, which is $0.45. You can also calculate the amount of your annual cash dividend by multiplying your quarterly dividend figure by 4. In this example, your annual dividend equals $1.80 per share.
Determining Your Dividend Income
Once you know the annual dividend per share of a stock, you can compute potential dividend income from buying that stock. You can calculate the payout amount you will be issued when you own a specific number of shares. To determine this amount, multiply the annual cash dividend per share by the number of shares that you intend to buy.
For example, if a stock pays $1.25 per share, it will pay $1,250 on 1,000 owned shares. The quarterly payout can be calculated by dividing $1,250 by 4, which equals $312.50 per quarter.
Understanding Your Dividend Yield
Dividend yield is a primary concern for any investor who is seeking current income. Your dividend yield is the percentage, or proportion, of your investment payout that you receive for a specific time period. This amount of time is typically one year. You can determine your percentage cash dividend yield in two simple steps.
First, divide the total dollar amount of your dividends received by the amount you initially paid for your shares. Next, multiply this number by 100, which will convert it to a percentage. If you bought 1,000 shares of stock for $30,000 and receive $1,400 in annual cash dividends, calculate as follows: $1,400/$30,000 X 100 provides a dividend yield that equals 4.67 percent.
How Cash Dividends Affect Stock Price
Cash dividends can affect stock price in a variety of ways. The payment of dividends to shareholders can have a projected and specific effect on a stock's market price. Share prices indicate future cash flows, and future dividend payouts are included in determining the stock price.
When a stock becomes ex-dividend, its share price is commonly reduced by an amount equal to the dividend that was paid. This indicates that new shareholders will not receive that dividend payment. Also, dividends that are paid in the form of stocks rather than cash may dilute earnings. This can result in a negative effect on short-term share prices.
You can determine how cash dividends are calculated using the cash dividend per share formula. Using this formula, you will gain an understanding of the value of investing in dividend stocks. By acquiring an understanding of your dividend stock income and yield, you will gain confidence in buying these stocks. After learning how cash dividends affect stock price, you will be proficient in the profitable practice of dividend stock investing.
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.