How to Calculate the Share of Income Paid as Dividends
The share of income paid in the form of dividends is a way of measuring the share of a company’s profits that is paid out to investors in the form of dividends over a set period (usually within a year), and does not go to the development of the company. In general, old and established companies have higher dividend ratios – their earnings levels have already risen significantly, while companies with lower dividend ratios are young companies with rapidly growing potential. To calculate the proportion of a company’s earnings paid out in dividends over a given period, use either Dividends Paid/Net Income or Annual Dividends Per Share/Net Earnings Per Share, which are equivalent.
use of net income and dividends
Image titled Calculate the Dividend Payout Ratio Step 1
Find out what the company’s net income is. To find the share of a company’s income that is paid out as dividends, first calculate its net income for the time period you are looking at (note that one year is the base period for calculating the share of income paid as dividends). This information is included in the company’s income statement. Let’s be clear: you need to calculate the profit of the company, taking into account all the expenses – taxes, business costs, discounts for damage to goods, depreciation and interest.
For example, suppose a start-up Jim’s Light Bulbs made $200,000 in its first year on the market, but had to spend $50,000 on the expenses listed above. In this case, Jim’s Light Bulbs net income would be $200,000 – $50,000 = $150,000.
Determine the amount of dividends to be paid. Then calculate the amount paid out by the company during the time period you are considering in the form of dividends. Dividends are funds that are paid to investors, and do not go to the development of the company. Generally, dividends are not reported on the income statement, but are included in the balance sheet and cash flow statement.
Let’s imagine that Jim’s Light Bulbs, a relatively young company, decided to invest most of its net income in expanding its production capacity and paid only $3,750 in quarterly dividends. In this case, we multiply 3750 by 4 = $15,000. This is the amount of dividends paid by the company in its first year of operation.
Divide dividends by net income. Once you know how much net income a company has earned and how much it has paid out in dividends over a given period of time, finding the proportion of earnings that are paid out in dividends is relatively easy. All you need to do is divide the company’s dividend payout by its net income – the resulting amount will be the share of income paid out in dividends.
In the case of Jim’s Light Bulbs, we can calculate the share of income paid out as dividends by dividing 15000/150000 = 0.10 (or 10%). This means that Jim’s Light Bulbs paid out 10% of its earnings to investors and invested the rest (90%) in the development of the company.
use of annual dividends and net income per share
Find out how many dividends per share. The method above is not the only way to calculate the share of earnings a company pays out in dividends. It can also be calculated by having two units of financial data. If you are interested in this alternative method, first calculate the company’s dividend per share (or DPS). This is the amount of funds received by each investor for each share in the share capital. This information is usually listed on the quarterly quotes pages, so you may need to add up a few numbers if you’re going to do a year-end analysis.
Let’s look at another example. Rita’s Rugs is an old, established company that doesn’t have enough space to grow in today’s market, and instead of using its profits to expand production, it gives it to its investors. Let’s imagine that Rita’s Rugs paid out $1 per share in dividends in the first quarter, $0.75 in the second quarter, $1.50 in the third, and $1.75 in the fourth. If we want to calculate the share of income paid out in dividends for the entire year, we will calculate: 1 + 0.75 + 1.50 + 1.75 = $4.00 per share, that is, the company’s dividend per share (DPS).
Determine earnings per share. Then calculate the company’s earnings per share (EPS) for the time period you are considering.