In order to run a dividend calculation, you can either use a dividend calculator, access your broker account, or do this yourself.
How is a dividend calculated?
Dividend calculations need several different values in order to work depending on your end goal:
- Dividend yield calculation
- Dividend per share (DPS), see below
- Earnings per share (EPS), see below
- Calculate dividend payout ratio (DPR), see below
Note, although the below calculations are useful, oftentimes a broker will provide you with these figures & more, under their fundamental analysis section.
Dividend calculation for DPS
DPS is a useful calculation when investors are reviewing the profitability of a company. In short, if this value rises over time, the company will be doing well. If it drops, the company either issued more shares or is earning less than before.
Dividend per share is calculated by taking the sum of total dividends, subtracting any potential special dividends, then dividend by the total shares outstanding.
The value returned, will give you the dividend amount you can expect to earn per share of that company.
Earnings per share calculation
Earnings per share can give you an idea of what profits shareholders would receive if all was paid in dividends. Hence, it is a good way of understanding if a company has enough financial liquidity to work with.
Calculating EPS is done as follows: Take the company’s net income and divide it by the outstanding shares.
Dividend calculation for DPR
The dividend payout ratio tells you how much of the net income is paid to shareholders. For example, a promise of a 15% dividend is often too good to be true. As this would mean a company would pay nearly a sixth of its profits back.
This is not sustainable as most organizations need this money to reinvest in R&D, inventory, staff, and other initiatives to stay ahead in the market & expand the business.
You can calculate the dividend payout ratio by dividing the total dividend by the net income of a company.
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