Companies that pay dividends attract attention from income investors. However, it's critical to know how much cash it takes for a company to meet its dividend obligations in order to gauge whether it can sustain those payments even if profits take a temporary hit. Below, we'll look at a couple ways to determine cash dividends paid.
The brute-force method
The simplest way to figure out how much a company pays in cash dividends is to look at its quarterly dividend distributions and then do the math necessary to figure out the total cash obligation. Companies routinely disclose how much they pay to common shareholders on a quarterly basis. If a company issues preferred stock, then it will also make those dividends public as well.
For common stock dividends, take the number of shares outstanding and multiply it by the per-share dividend for each quarter. Add the four quarterly figures up and you'll have total cash dividends paid for the year. The number won't be entirely precise because exact share counts on the dividend declaration date won't match up perfectly with the average reported share count over the period. However, the result should be close enough in most situations to give you a good estimate.
Similarly, for preferred stock dividends, take the total preferred stock outstanding and multiply it by each quarter payment. Preferred stock share counts tend to be more stable than common stock, so this estimate will typically be a lot more precise than the common-stock dividend calculation.
Using financial reports
Some companies are kind enough to do all the work for you in calculating total cash dividends paid. Many cash flow statements will include dividend payments as a financing-related cash flow. In that case, determining the cash dividends paid is trivial, because the company will list the exact figure directly on the cash flow statement.
There are also some more indirect ways to figure out cash dividends paid. For instance, by looking at income statements and balance sheets, you can figure out how much of a company's net income is reflected in retained earnings. If retained earnings rise by less than net income and the company has no other capital financing transactions, then the difference will typically be due to dividends. This gets a lot more complicated than other methods, but you can sometimes use it as a cross-check against alternative ways to calculate cash dividends paid.
Knowing cash dividends paid will tell you a lot about how a company uses its available capital. By ensuring that a company isn't using too much of its spare cash in dividends, you can get a comfort level about how secure its dividend will be if something bad happens to its ability to earn profits.
To learn more about stocks and how to start investing, head on over to The Motley Fool's Broker Center and find the best broker for you.
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 firstname.lastname@example.org. Thanks -- and Fool on!