Most people pay attention to the rising and falling of stock prices on Wall Street, without even noticing the way that many investors build their wealth: dividends. But what exactly are dividends, and how do you calculate how much they’re worth?
How to Use a Stock Dividend Calculator
- Determine Number of Stocks
- Look Up Current Stock Price Per Share
- Look up the Dividend Yield
- Multiply Those Numbers to Find the Annual Payout
- Divide that Number into Quarters
What is a Stock Dividend?
As you probably already know, a share of stock is a share of ownership in a company. Companies sell stocks to raise money to grow their business. Some stocks also pay dividends. This is when a company pays out company profits to their shareholders. A cash dividend is paid out to each and every share of common stock held by an investor, whether that investor is Warren Buffet or a simple retail investor with a retirement portfolio managed by someone else.
Dividends can be residual or stable. Residual dividends are paid out after all expenses have been paid and the company has financed new projects. The positive aspect to this residual dividend payout strategy is that it creates flexibility for the company to grow, while also offering investors the chance to collect dividends. The drawback is that dividends will not be consistent because profits will fluctuate, and payouts can shrink if the company finances new projects.
Stable dividends, by contrast, are fixed as much as possible. A company that pays fixed dividends will do so year in and year out regardless of fluctuations in profit. They are able to do this by forecasting future earnings and setting a percentage to be paid out to shareholders, referred to as the target payout ratio. The company can also choose a more cyclical calculation that applies dividend payouts to quarterly earnings, or it can apply this percentage to forecasted annual earnings to make each quarterly payout the same.
Some companies have increased their dividend payouts consistently for the past 50 years. And Dividend Aristocrats are companies that (1) have increased their dividend payout for the past 25 years and are also (2) part of the S&P 500 list of largest companies.
As a last note, it should be clarified that dividend payments are only issued to holders of common stock; not preferred stock. Preferred stockholders typically do not collect dividends. If you’re wondering what benefits preferred stock holds (since they don’t offer an annual dividend or even a quarterly dividend), it’s that preferred stockholders are more likely to get their money back if the company goes under or needs to liquidate assets. In most cases, preferred stock also does not provide voting rights, whereas common stock does.
That’s right…if you hold shares of common stock, you can actually cast a vote in matters of company policy, and you’re also invited to the annual shareholders meeting.
Why Do Companies Pay Dividends?
Companies pay dividends because it makes their stock more attractive to investors. And companies also pay dividends because it’s an equitable way of partitioning profits among owners.
Remember that each and every shareholder is a partial owner of the company, and while someone with 10, 100, or even 1,000 shares of a company stock may not sit on the board, the company executives do often own sizable shares of company stock, which gives them a controlling interest. There are also investors who have put a lot of money into the company by purchasing stock. These people want to get their bonus, and dividends are their payout.
If you’re familiar with economic theory, you might be familiar with the “Invisible Hand” described by British economist, Adam Smith, from several hundred years ago. The Invisible Hand is the idea that a free market guides people and businesses to ultimately make decisions that are beneficial for the macrocosm of the world, and the microcosm of the individual. That would certainly seem to be the case with the stock market and the capital gain an investor can see with common stock. A dividend paying stock multiplied by dozens or hundreds or thousands of shares becomes a true source of financial freedom. That’s why many of the wealthiest investment gurus have pointed to dividend stocks and the dividend income they produce as their road to wealth.
How and When Are Stock Dividends Paid Out?
Dividends are typically paid quarterly, though some companies pay them monthly or annually. Most retail investors hold their stocks inside of a portfolio serviced by their bank, whether it’s self-guided or managed by a financial advisor (like that of a mutual fund). The dividends from the dividend-paying stocks they own will be deposited into their portfolio in the form of cash. They can take this cash as part of their income stream, or reinvest it back into their stock portfolio for future passive income investing.
Technically, dividends are most often paid in the form of a check mailed on (or around) the ex-dividend date, which is the date that the stock begins trading again after dividends are declared. But most investors never see these checks because their stocks are held by the bank or brokerage they use to buy and sell stocks. This bank will take the annual dividend payout or quarterly dividend payout and then partition that among their customers who hold shares of the dividend paying stock in question. If they have a dividend reinvestment plan, the dividend reinvestment will be automatic and the dividend payment will be put back into the portfolio. This is one of the ways that a retail investor can really jumpstart their portfolio, in addition to the natural growth of the prices of the stocks that make up their investments.
So as exciting as dividends sound, you’re probably wondering if you can see exactly how much money you can get from dividends. You won’t need to figure out a dividend yield formula and apply that to the prices of the stocks you own, because Wall Street already supplies the dividend rate for you. This is called the dividend yield. You can use a dividend yield calculator to figure this all out, but you can also figure it out yourself using some simple math.
If you have a dividend reinvestment plan, a dividend reinvestment calculator might be a useful tool for a little more complex of a scenario in terms of getting the information needed, since you will also need to take into account annual contributions and the growth of the securities you own already. But if you’re just trying to figure out the dividend payout you’ll get from a certain stock, you follow these steps below.
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How to Use a Stock Dividend Calculator
1. Determine Number of Stocks
In order to estimate your dividend payouts, you are going to need to know how many shares of stock you own. This information is easy enough to find, and you can usually locate it in the online dashboard of whatever brokerage you use. For instance, if you are using Robinhood, it’s as simple as going to the home screen and seeing how many shares of a certain stock you own.
2. Look Up Current Stock Price Per Share
You will then need to find out the current price per share. Again, this is as simple as looking at the current stock price as listed on your brokerage app, or on the internet via a stock ticker, like the ones provided by Yahoo or Google.
3. Look up the Dividend Yield
The dividend yield is a number that reflects (as a percentage) the annual total of dividends to the stock price. If you’re wondering what typical dividend yields are, it really varies. A company going through intense growth probably won’t pay any dividends, since the money they make will likely be reinvested in their growth. As such, they won’t show a dividend yield.
However, a company that is in a stable place is more likely to show dividends. Industries like consumer staples, utilities, and financial services usually tend to pay dividends ranging from one percent up to six percent or more. Whatever the dividend yield may be, it can change, depending on whether the company is set up to operate towards a dividend increase, or if times have been leaner and they need to decrease their dividend. Take a look at what the dividend yield is the day you are doing your calculation so the information will be the most up to date.
4. Multiply Those Numbers to Find the Annual Payout
You’re going to take all the numbers you have, namely the stock price and the dividend yield, and multiply them together for an estimate.
For example, if a stock is trading at $100 and its dividend yield three percent, that means each share will yield $3 annually. Remember, this is just an estimate. You won’t really know what the dividend is until it’s mailed to you, unless the company has declared fixed dividends ahead of time (in which case, there is still the possibility that you won’t get what you’re planning until it hits your brokerage account).
5. Divide that Number into Quarters
Remember that dividends are typically paid quarterly. This means you should divide that number by four. In the above example of a stock with a $100 share price and three percent dividend yield, an annual $3 ends up being four quarterly payout of $0.75.
Again, remember that the above formula is really only an estimate, and unless a company has a stable dividend calculated ahead of time, not even a stock dividend calculator on the best trading apps can tell you exactly how much you can expect to receive. Even so, the above calculation is useful enough for estimating dividend payouts, whether you own the stock already or you’re trying to figure out if a dividend stock is a good buy.
Another thing to keep in mind is that mutual funds will take management fees out, so your dividend income might be impacted by these charges and fees.
Dividends are particularly useful if you are trying to build long term wealth. Whether you are micro investing by rounding off your change and having it automatically deposited into a robo advice brokerage, or actively building your own stock portfolio, dividends are the rivulets that can eventually turn into a mighty income stream, especially if they are reinvested.
Stock Dividends Are Payouts to Investors
This is a great formula for understanding the potential dividend of a given stock, but remember it’s just an estimate. Also keep in mind that EPS (earnings per share) will not really provide a dividend payout ratio. Rather, it takes company profit and divides it per share. But remember that a company can decide how much of their profits they want to pay out as dividends, or even if they want to pay dividends in the first place.
That said, EPS is a better stat for analyzing the overall health of the company rather than determining how much you’ll get in terms of a dividend payout. That’s what the dividend yield is for, and if you want to know what dollar amount that likely translates to, you should use a dividend calculator, or in the absence thereof, use the steps listed above.
If you have more questions about stock dividends or the potential of a given stock investment, we invite you to join our weekly Stock Trading Room. Our investing experts provide thorough explanations of the most common stock market issues, while also discussing proven strategies to grow your portfolio. Hope to see you there!
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