Calculate Stocks Dividend
Calculate Stocks Dividend
The Tsitsiringos Method for Determining Dividend Payout
Any business course would have taught you that “a company should only pay dividends if it is unable to reinvest its cash at a higher rate than the shareholders (owners) of the business would be able to if the money was in their hands. If company ABC is earning 25% on equity with no debt, management should retain all of the earnings because the average investor probably won’t find another company or investment that is yielding that kind of return.”
At the same time, an investor may require cash income for living expenses. In these cases, he is not interested in long-term appreciation of shares; he wants a check with which he can pay the bills.
Dividend Payout Ratio
The percentage of net income that is paid out in the form of dividend is known as the dividend payout ratio. This ratio is important in projecting the growth of company because its inverse, the retention ratio (the amount not paid out to shareholders in the form of dividends), can help project a company’s growth.
Calculating Dividend Payout Ratio
A shipping company in 2009 s cash flow statement shows that the company paid $2.166 million in dividends to shareholders. The income statement for the same year shows the business had reported a net income of $4.347 million. To calculate the divided payout ratio, the investor would do the following:
$2,166,000 dividends paid
———(divided by)———
$4,347,000 reported net income
The answer, 49.8%, tells the investor that the shipping company paid out nearly fifty percent of its profit to shareholders over the course of the year.
Dividend Yield
The dividend yield tells the investor how much he is earning on a common stock from the dividend alone based on the current market price. Dividend yield is calculated by dividing the actual or indicated annual dividend by the current price per share.
A tanker company pays an annual dividend of $7 and trades at $910 per share; A dry bulk company pays an annual dividend of $2.72 and trades at $49.75 per share. By calculating dividend yield, the investor can compare the amount he would earn in cash income annually from each security.
Tanker company Dividend Yield Calculation
$7.00
—-(divided by)—-
$910
= 0.0077 or 0.77%
Dry bulk company Dividend Yield Calculation
$2.72
—-(divided by)—-
$49.75
= 0.055 or 5.5%
Conclusion
In other words, despite the fact that the Tanker company pays a higher per-share dividend, $100,000 invested in its common stock would yield only $770 in annual income as opposed to the same amount invested in dry bulk which would yield $5,500. An investor interested in dividend income and not capital gains should opt for the latter, all else being equal.
Excel Finance Class 66: Calculate Implied Return using Dividend Growth Model
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