One of the ways you can realize profits from investing in stocks is when the companies pay out dividends to their investors. Investors use a variety of measures to compare the dividends paid by different companies, including the dividend rate, dividend payout ratio and the dividend yield. The dividend rate helps you compare the dividends paid out by different stocks or mutual funds over the course of a year. If you only look at how much the company paid out in its most recent dividend, you could be missing out because it might not pay dividends as often as other companies.
Calculating the Dividend Rate
The dividend rate formula calculates how much a company pays out in dividends each year. To calculate the dividend rate, multiply the company’s periodic dividend payment by the number of payments per year and then add any special dividends paid during the year.
For example, say that one stock pays a quarterly dividend of 60 cents and a one-time dividend of 15 cents. Multiply the quarterly dividend of 60 cents by four because it is paid four times per year to get $2.40 and then add 15 cents to find the dividend rate for the stock is $2.55. Alternatively, if a stock pays a semiannual dividend of 90 cents and offers no special dividends, multiply the semiannual rate by two to find the dividend rate is $1.80. Therefore, even though one stock has a higher payment for each dividend, it has a lower dividend rate.
Calculating the Dividend Payout Ratio
After you’ve calculated the dividend rate, you can also calculate the dividend payout ratio to gauge how much of the company’s profits each year are being paid out in dividends. To make the calculation, divide the dividend rate by the company’s earnings per share over the past 12 months. For example, if a company has a dividend rate equal to $2.55 and earnings per share of $5.10, divide $2.55 by $5.10 to get 0.5 or 50 percent.
Calculating the Dividend Yield
The dividend yield measures the dividends paid out relative to the price of the stock. The higher the dividend yield, the larger the dividend relative to the stock price. To calculate the yield, divide the dividend rate by the price of the stock. For example, say a stock pays annual dividends of $2.55 and the stock is priced at $50. To find the dividend yield, divide $2.55 by $50 to get 0.051 or a 5.1-percent dividend yield.
Items you will need
- Financial publication
- Jupiterimages/Photos.com/Getty Images
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