The income statement is one of the three main financial statements used by companies when reporting their results. The income statement shows you a company's revenues and subtracts all of the various expenses incurred in order to arrive at the net income, or profit.
Dividends paid to common stockholders are not an expense; therefore, they aren't listed anywhere on the income statement. Rather, since they are one way that cash can move out of a company, they are listed on the cash flow statement in the financing section. And since dividends are subtracted from net income to calculate retained earnings, they are also listed in the stockholders' equity section of the balance sheet. So the income statement is actually the only one of the three major financial statements that does not list dividends paid.
Having said that, if a company has a consistent payout ratio (percentage of earnings paid out as dividends), you can get a rough estimate of the dividends it will pay to shareholders.
Estimating dividends per share from the income statement
In order to estimate the dividend per share, you must first locate the net income figure from the income statement. This is generally the last item on the income statement, which is why it's referred to as the "bottom line." Next, divide this amount by the total number of outstanding shares, which you should be able to find in a stock quote. Dividing the net income by the outstanding shares will give you the net income per share.
Then, multiply this amount by the company's typical payout ratio, converted to a decimal. So, a 50% payout ratio would be 0.5. This will give you the approximate annual dividend. If you want the quarterly dividend, simply divide this amount by four.
For example, let's say that a particular company has historically paid out between 40% and 46% of its net income as dividends. Using the midpoint of that range, you can use 43% as the typical payout ratio.
If the company earned $10 million and has five million outstanding shares, our formula shows a net income of $2.00 per share. Based on the 43% typical payout ratio, we can estimate this company's dividend to be $0.86.
Getting into stock investing? Check out our broker offers!
This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors. We'd love to hear your questions, thoughts, and opinions on the Knowledge Center in general or this page in particular. Your input will help us help the world invest, better! Email us at email@example.com. Thanks -- and Fool on!
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.