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 dividend. 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.
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 earnings.
Sometimes, the firm or the organization doesn’t desire to pay anything to their stockholders as the management would feel the need to reinvest the profits earned by the company as that can aid the firm to grow bigger and faster.
Let’s see some simple to advanced examples to understand it better.
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.
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 payout.
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Therefore, the calculation of the Dividend Payout Ratio is as follows,
Dividend Formula =Total Dividends / Net Income
= 150,000/ 450,000 *100
Dividend Payout will be –
- 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%.
Current Dividend Payout = 35.33%
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 statement of BSE Ltd., and the following are the details. You required to ascertain whether Mr. Lesnar would be investing in this company?
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.
Therefore, the calculation of the Dividend Payout Ratio for 2017 will be as follows,
Dividend Ratio 2017= Total Dividends /Net Income
= 150.64 /220.57 x 100
Dividend Payout for 2017 will be –
- Dividend Ratio 2017 = 68.30%
Therefore, the calculation of the Dividend Ratio for 2018 will be as follows,
Dividend Formula 2018 = Total Dividends/Net Income
= 191.70 / 711.28 x 100
Dividend Payout for 2018 will be –
- 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.
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 statements 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.
First, we need to ascertain the net profit of the company for report date Mar -2017.
Therefore, the calculation of Dividend Payout for 2017 will be as follows,
Dividend Payout 2017 = Total Dividends /Net Income
= 353,000 / 460,000 x 100
Dividend Payout Ratio for 2017 will be –
Dividend Payout 2017 = 76.74%
You can use this calculator
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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 ratio, 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 share, dividend yield, etc.
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 –