Most companies report their dividends on a cash flow statement, in a separate accounting summary in their regular disclosures to investors, or in a stand-alone press release, but that's not always the case. If not, you can calculate dividends using a balance sheet and an income statement. You'll find these in a company's 10-K annual report.
Here is the formula for calculating dividends: Annual net income minus net change in retained earnings = dividends paid.
Using net income and retained earnings to calculate dividends paid
To figure out dividends when they're not explicitly stated, you have to look at two things. First, the balance sheet -- a record of a company's assets and liabilities -- will reveal how much a company has kept on its books in retained earnings. Retained earnings are the total earnings a company has earned in its history that haven't been returned to shareholders through dividends.
Second, the income statement in the annual report -- which measures a company's financial performance over a certain period of time -- will show you how much in net earnings that a company has brought in during a given year. That figure helps to establish what the change in retained earnings would have been if the company had chosen not to pay any dividends during a given year.
How to calculate dividends from the balance sheet and income statement
To calculate dividends for a given year, do the following:
- Take the retained earnings at the beginning of the year and subtract it from the end-of-year number. That will tell you the net change in retained earnings for the year.
- Next, take the net change in retained earnings and subtract it from the net earnings for the year. If retained earnings has gone up, then the result will be less than the year's net earnings. If retained earnings have fallen, then the result will be greater than the net earnings for the year.
The answer represents the total amount of dividends paid.
For example, say a company earned $100 million in a given year. It started with $50 million in retained earnings and ended the year with $70 million. The increase in retained earnings was $70 million minus $50 million, or $20 million.
Here's the math: $100 million net income-$20 million change in retained earnings = $80 million paid in dividends.
Calculating the dividend payout ratio
One of the most useful reasons to calculate a company's total dividend is to determine the dividend payout ratio, or DPR. This measures the percentage of a company's net income that is paid out in dividends.
Dividend Payout Ratio = Total Dividends ÷ Net Income
Take total dividends divided by net income, and you will get DPR.
This is useful in measuring a company's ability to keep paying or even increasing a dividend. The higher the payout ratio, the harder it may be to maintain it; the lower, the better.
Estimating dividends from the income statement alone
If a company has a consistent payout ratio, you can use the income statement to estimate what dividends it's likely to pay, without needing the balance sheet at all.
- Find net income on the income statement (typically the last line, which is why it's called the "bottom line").
- Divide net income by shares outstanding to get net income per share.
- Multiply by the company's typical payout ratio (expressed as a decimal) to estimate the annual dividend per share. Divide by four for the quarterly figure.
Example: A company has historically paid out 40%–46% of net income as dividends. Using the midpoint, 43%, as the typical payout ratio: if the company earned $10 million with five million shares outstanding, net income per share is $2.00. Multiply by 0.43 and you get an estimated dividend of $0.86 per share.
This approach only works reliably when a company's payout ratio is consistent. It won't be useful for companies with irregular dividend histories.
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