Dividends are those payments which are made by an organization to its shareholder members. It is the portion of the organization’s profits paid out to the stockholders. Therefore, it is very important that you know how to calculate dividend. When an organization earns a profit or surplus then that money can be put for two uses:
- It can be re-invested in the business which is known as retained earnings or
- It can be paid directly to the shareholders as a dividend.
Many organizations keep a section of their earnings for re-investment purpose and pay the left portion as a dividend.
The payment to stockholders from the organization’s earnings is called as the dividend. Dividend payments differ widely as they depend upon the type of stock and the organization’s strategy for the business. Very profitable organization which is strongly oriented toward growth can pay low dividends or they may not pay anything as the profits are being reinvested. Other organizations which are well established can pay higher dividends mostly on preferred stock. Any dividend payments depend upon the organization making revenue in the first place.
Calculation of dividend is easy. Here some steps are given to calculate the dividend your organization is going to pay you.
Steps for calculation
- Compute a dividend payment to know how much you will be given which is based on the number of shares you own. Normally dividends are paid quarterly; this calculation can be done either on an annual basis or a quarterly basis. The number of shares should be multiplied by the annual dividend to determine how much will be the dividend payment. Let us assume, for example, if you have 1500 shares of ABC Company and the dividend to be paid is $ 1.50 per share, your annual dividend payment will be $ 2,250. Divide the obtained amount by 4 to find out the quarterly payment, which will be $ 562.50.
- Determine the yield on investment a dividend payment shows. This yield is the annual percentage of your investment paid as dividends. For example, if you paid $ 20 a share for a stock and the dividend is determined as $ 1.50, your yield will be $ 1.50 divided by $ 20. Multiply the obtained amount by 100 to get the percentage. The yield given in this example comes out to 7.5 percent after calculation. But if you are paid $150 per share, your yield comes out to only 1.0 percent. Yield is significant to those investors who are looking for stocks which will provide good income.
- Find out the dividend-payment ratio. This ratio is the ratio of dividends of the organization’s net income. Let us assume, for example, if the company has net income of $ 25 million and it paid out $ 10 million as dividends, the dividend-payment ratio will be $ 25 million divided by $ 10 million and hence we got the ratio as 2.5. Growth-oriented companies generally have high dividend-payment ratios, representing that they are keeping most of the net income to invest for development. On the other hand, a low dividend-payment ratio represents that the company is not likely to grow much. If such a company is showing a high yield then it can be a good investment if the thing you are
looking for is income rather than equity growth.
- Find out the dividend cover. This dividend cover is a variation of the dividend-payment ratio. Dividend cover is just the earnings per share divided by the dividend. Let us assume, for example, if earnings per share are $ 2.50 and the dividend to be paid is $ 1 per share then the dividend cover is 2.5. Dividend cover is helpful as generally it is easier to find the earnings and dividend amounts per share than the net earnings and total paid out in dividends.
Calculating dividend is not a very tough task. I hope this article would have benefited you in calculating dividends.
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