How To Calculate Dividends Paid to Stockholders with Retained
Dividends are the payments to the shareholders in the form of some percentage of the profits left after all interest and tax disbursements are catered for. The company is not liable to pay ordinary shareholders, as they are accountable to pay the preferred shareholders who have cumulative and preferred shares. This makes the calculation of dividends a bit confusing.
Instructions
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There are two approaches to calculate the dividends. Firstly the financial statements, balance sheet and income statement are needed to be reviewed in order to calculate the dividends paid to the shareholders. The press release announces the dividend per-share amount and the payment date. Now you need to determine the overall amount which must be paid in dividends. It will be done by simply multiplying the total share count by the price of one share. After that, a payment date is set by the company, on which they are bound to pay the dividends.
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On the contrary a backward method to calculate the dividends is to find out the number of shares outstanding from the shareholders' equity section of the balance sheet. Notes below the common indicate the number of shares outstanding.
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Having done that, the income statement is now to be studied. Net income is to be located, which is usually at the end of the income statement. It is equal to sales minus the sum of cost of goods sold, operating expenses, interest expenses and taxes.
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Following this, the amount of retained earnings is to be sited, which is right below it. The difference between these two figures is the dividends paid to the shareholders. This amount can be divided by the number of shares and the dividend per share can be retrieved. It is pertinent to mention that not always is the case that companies pay dividends, although they may be earning profits.
When a company has a surplus balance, the management takes one of the two routes. They can either distribute the profits to its shareholders in the form of dividends (in this case cash) it or simply preserve the surplus amount and inject it back in the business, which will facilitate expansion. The scenario changes if you incur losses. They will be classified as retained earnings or accumulated losses. -
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For instance, the retained earnings for a specific year were $590,000. If the reported net income for the following year is $60,000, and the retained earning amount is reported to be $500,000, then the dividends paid to shareholders for that year is, 590,000+60,000-500,000= $150,000 – the amount paid to the stockholders as dividends. Now you will need to divide this total with the number of outstanding shares to determine the price dividend paid per share.
