Dividend Formula

What is Dividend Formula?

When an organization or a firm earns a profit at the end of the accounting year, they may take a resolution in the board meeting or through shareholder’s approval in certain cases to share a portion of their earned profits with their stockholders, which are called as the dividendDividendDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity.read more. By using the below formula, we can find out the percentage of dividend that is paid to the stockholders out of the net profit earned for that accounting year.

Dividend Ratio Formula = Total Dividends/ Net Income
Dividend-Formula

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Source: Dividend Formula (wallstreetmojo.com)

Explanation of Dividend Formula

For an organization or the firm, sharing of the profit that is earned is an after-thought. First, the management will decide how much they can reinvest into the firm so that the business of the firm can grow huge, and the business can multiply the stockholders’ hard-earned money instead of just sharing with them. That’s the reason dividend is crucial.

Furthermore, it tells one about how much is the firm or the organization is rewarding or, in order words, paying the dividend to its stockholders. And further again, how much the firm or the organization is reinvesting into itself, which can be called the retained earningsRetained EarningsRetained Earnings are defined as the cumulative earnings earned by the company till the date after adjusting for the distribution of the dividend or the other distributions to the investors of the company. It is shown as the part of owner’s equity in the liability side of the balance sheet of the company.read more.

Sometimes, the firm or the organization doesn’t desire to pay anything to their stockholders as the management would feel the need to reinvestReinvestReinvestment is the process of investing the returns received from investment in dividends, interests, or cash rewards to purchase additional shares and reinvesting the gains. Investors do not opt for cash benefits as they are reinvesting their profits in their portfolio.read more the profits earned by the company as that can aid the firm to grow bigger and faster.

Calculation Examples

Let’s see some simple to advanced examples to understand it better.

You can download this Dividend Formula Excel Template here – Dividend Formula Excel Template

Example #1

Patel limited last paid dividend for 150,000 when it made a net profit for 450,000. This year also, the company is looking to pay a dividend as they have done spectacular business, and shareholders are pleased about it. The company has decided to increase its dividend by 2% than last year. Compute the dividend payout ratio for this year.

Solution:

We are given last year’s dividend and net profit as 150,000 and 450,000, respectively. We can use the below formula to calculate dividends and come out with dividend payoutDividend PayoutThe dividend payout ratio is the ratio between the total amount of dividends paid (preferred and normal dividend) to the company's net income. Formula = Dividends/Net Incomeread more.

Example1

Therefore, the calculation of the Dividend Payout Ratio is as follows,

Dividend Formula Example1.1jpg

Dividend Formula =Total Dividends / Net Income

= 150,000/ 450,000 *100

Dividend Payout will be –

Example1.2jpg
  • Dividend Payout = 33.33%

Now the company proposes to pay an additional dividend of 2% from last year, and hence this year, the dividend would be 33.33% + 2.00%, which is 35.33%.

Example1.3jpg

Current Dividend Payout = 35.33%

Example #2

Mr. Lesnar is a wealthy investor and is now considering the Indian stock market to invest in. However, he is a little skeptical and wants to be risk-averse as he is new to the market. He has heard a name about BSE since that is also a recognized exchange in the market. He will only invest if the company has a dividend payout ratio for more than 30% for the last two years. He has extracted the income statementIncome StatementThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements.read more of BSE Ltd., and the following are the details. You required to ascertain whether Mr. Lesnar would be investing in this company?

Solution:

We are given the last two year’s dividend and net profit as 150.64 million, 191.70 million, and 220.57 million, 711.28 million, respectively.

Example2

Therefore, the calculation of the Dividend Payout Ratio for 2017 will be as follows,

calculation of dividend payout ratio Example2.1jpg

Dividend Ratio 2017=  Total Dividends /Net Income

=  150.64 /220.57 x 100

Dividend Payout for 2017 will be – 

Dividend Formula Example2.2jpg
  • Dividend Ratio 2017 = 68.30%

Therefore, the calculation of the Dividend Ratio for 2018 will be as follows,

calculation of dividend payout ratio Example2.3jpg

Dividend Formula 2018 = Total Dividends/Net Income

=  191.70 / 711.28 x 100

Dividend Payout for 2018 will be – 

Dividend Formula Example2.4jpg
  • Dividend Payout 2018 =  26.95%

Since the dividend payout ratio for 2018 is less than 30%, Mr. Lesnar may not choose to invest in BSE Ltd.

Example #3

Swastik limited, a small company in the Valsad district, registered itself as a private limited company. The directors are in the stage of finalization of financial statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more and want to pay dividends for 353,000, but they are not sure what percentage of profits they are giving as dividends. You are required to ascertain the dividend payout ratio based on below extracts from financial statements.

Dividend Formula Example3.1jpg

Solution

First, we need to ascertain the net profit of the company for report date Mar -2017.

calculation of dividend payout ratio Example3

Therefore, the calculation of Dividend Payout for 2017 will be as follows,

calculation of dividend payout ratio Example3.2jpg

Dividend Payout 2017 = Total Dividends /Net Income

353,000 / 460,000 x 100

Dividend Payout Ratio for 2017 will be – 

calculation of dividend payout ratio Example3.3pg

Dividend Payout 2017 = 76.74%

Dividend Calculator

You can use this calculator

Total Dividends
Net Income
Dividend Payout Ratio
 

Dividend Payout Ratio =
Total Dividends
=
Net Income
0
= 0
0

Relevance and Uses

Understanding the mathematics between dividend payments and retained earnings will aid an investor or the shareholder to comprehend the short term as well as the long-term goal and the objective of the firm or of the company. This dividend can also be used to find out the retention ratio of the company. When you subtract the dividend payout ratio from 1, you will get the retention ratioRetention RatioRetention ratio indicates the percentage of a company’s earnings which is not paid out as dividends but credited back as retained earnings. This ratio highlights how much of the profit is being retained as profits towards the development of the firm.read more, which depicts how much the company is confident for its future and how much they want to invest.

This kind of ratios are mostly used by the stock analyst, investors to ascertain the confidence of the company. There are also other dividend ratios that should be looked at consolidate level and not judge on a single ratio like dividend per shareDividend Per ShareDividends per share are calculated by dividing the total amount of dividends paid out by the company over a year by the total number of average shares held.read more, dividend yieldDividend YieldDividend yield ratio is the ratio of a company's current dividend to its current share price.  It represents the potential return on investment for a given stock.read more, etc.

Recommended Articles

This has been a guide to Dividend Formula. Here we discuss how to calculate dividend ratio using its formula along with practical examples and a downloadable excel template. You can learn more about financial analysis from the following articles –