Formula for Calculating the Earnings Available for Common Stockholders

Formula for Calculating the Earnings Available for Common Stockholders
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Provided that you have access to the appropriate financial data, calculating the earnings available for common stockholders is relatively simple. The calculation involves first finding the number of dividends paid and then finding the amount paid per share. Using the number of common shares outstanding, you can then find the total available to common stockholders.

Read More:Benefits of Stockholders

What are Dividend Payments?

Some publicly traded companies will pay their stockholders a percentage of their profits. This payment is known as a dividend. When a company pays out dividends to shareholders, each share of stock held entitles the owner to a set payment amount. Companies can pay dividends in cash or provide their shareholders with more shares of stock.

Companies are not required to pay out dividends. A company may wish to hold back dividend payments so it reinvests earnings back into the company. If a company does pay dividends, these bonus payments may be made monthly, on a quarterly basis, or once a year.

Paying stockholders dividends, however, makes a company's shares more desirable. This increases the price of each share, which, in turn, increases the value of the company.

Read More:When Does a Dividend Accrue?

Earnings Available for Common Stockholders Formula

To calculate the earnings available for common stockholders, you should first calculate the number of dividends the firm will pay out in a given time period. This is found by multiplying the dividend payout ratio by the company's net income. You can find the dividend payout ratio and the company's net income from the company's annual or quarterly financial statement.

After calculating the dividend payment, divide by the number of shares outstanding. This includes both common and preferred stock. This final figure represents the dividend payment per share.

Calculating Dividend Payments Example

Assume that a company has reported a net income of $1 million for the first quarter, and it has announced that it will pay dividends on both common and preferred stock. Specifically, the company will pay a dividend payout ratio of 0.5. So, multiplying $1 million by 0.5 gives a total dividend payout of $500,000.

The company has 900,000 common shares outstanding and 100,000 preferred shares outstanding. Assuming that the dividend payout ratio applies to all types of stock, dividing $500,000 by one million gives a dividend payment of $0.50 per share. Multiplying $0.50 by the total number of common shares outstanding gives a total of $450,000 available for common shares, not preferred shares.

Find the Dividend Yield

Calculating the amount a common share will pay in dividends is often not of enough use to investors. Investors are more interested in the number of dividends paid with respect to the price paid per share. This is known as the dividend yield. You can find the dividend yield by dividing the last payment per share by the share's current price.

The higher the dividend yield, the more the company pays with respect to the share price. So, if you received $0.50 during the last dividend payout, and the current stock price is $10, then you would receive a return of 5 percent on that particular common stock. Higher dividend yields may signal that the company is underpriced.