How to calculate dividends paid

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What is a Dividend?

A dividend is a payment made to shareholders that is proportional to the number of shares owned. Dividends are usually issued by companies that will not reap significant growth by reinvesting profits, and so instead choose to return funds to shareholders in the form of a dividend. Companies may also issue dividends in order to attract income investors, who are looking for a steady source of income, and which can be reliable long-term holders of company shares.

How to Calculate Dividends Paid

You might want to know how much a company has paid out in dividends in the past year. If the company has not directly disclosed this information, it is still possible to derive the amount if you have access to the company's income statement and its beginning and ending balance sheets. If these reports are available, the calculation of dividends paid is as follows:

  1. Subtract the retained earnings figure in the ending balance sheet from the retained earnings figure in the beginning balance sheet. This calculation reveals the net change in retained earnings derived from activity within the reporting period.

  2. Go to the bottom of the income statement and extract the net profit figure.

  3. If the net profit figure on the income statement matches the net change in retained earnings from the first calculation, then no dividend was issued during the period. If the net change in retained earnings is less than the net profit figure, the difference is the amount of dividends paid out during the period.

The concept can be further refined by dividing the derived amount of dividends paid by the number of outstanding shares (which is listed on the balance sheet). The result is dividends paid per share.

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The Interpretation of Financial Statements

Example of Dividends Paid

As an example of dividends paid, a business reports beginning retained earnings of $500,000 and ending retained earnings of $600,000, so the net change in retained earnings in the period was $100,000. During the year, the company also reported $180,000 of net profits. In the absence of any dividend payments, the entire $180,000 should have been transferred to retained earnings. However, there was only a residual increase of $100,000 in retained earnings, so the $80,000 difference must have been paid out to investors as a dividend.