How to Calculate Rate of Dividend: Step-by-Step Guide
Dividends are a way for companies to distribute a portion of their profits to their shareholders. The dividend rate measures how much a company's earnings are being paid to shareholders and is often expressed as a percentage. It is an essential metric for investors as it indicates the company's financial health and potential for future growth. The dividend rate is calculated to determine the amount of money a shareholder will receive for each share of stock they own. In this article, we will explain the rate of dividends and its formula in an easy-to-understand way.
What is a Dividend?
Dividends are amounts that must be divided by other amounts. An algebraic expression, a fraction, or an integer could be used. In algebra, the division is usually represented by placing the dividend over the divisor and separating them with a horizontal line. This horizontal line is also known as a "fraction bar." For example, x divided by y can be written as x/y, which means "x over y" or "divide x by y." In this case, x is the dividend, and y is the divisor.
Take 3 to 4. 3 is the dividend, and 4 is the divisor in this fraction. In fractions, the divisor is referred to as the numerator, and the dividend is the denominator. The outcome of dividing the dividend by a divisor is either an integer or a decimal number.
Rate of Dividend Formula
Formula of Dividend
The dividend rate is the amount of cash a shareholder gets divided by the value of the shareholder's stock on the market. Divide the annual dividend per share by the stock price to get the dividend rate per share.
Rate of dividend formula = Dividend per share / Price per share at the moment
Example of Dividend Rate
Let's say a company called "CandyCo" makes and sells candy. They made $100,000$ in profits this year. The company decides to give $20,000$ of those profits back to their shareholders as dividends. To calculate the dividend rate, we divide the number of dividends paid ($20,000)$ by the total profits ($100,000)$. So:
$20,000$ (dividends) ÷ $100,000$ (profits) = 0.2 or 20%
So the dividend rate for CandyCo is 20%. This means that for every dollar of profit, the company makes, 20 cents is paid out to shareholders as dividends.
In a simpler way, you can think of it as a company with a big jar of money (the profits), and they share some of it with the people who own part of the company (the shareholders) as a thank you. The dividend rate is like a "share" of that jar of money they give back to shareholders.
Formula: Dividend Rate = Dividend Per Share / Current Share Price
Defining Payout Ratio for Dividends
The payout ratio for dividends measures how much of a company's profits are being paid out to shareholders as dividends. It's calculated by dividing the number of dividends paid by the company's earnings per share (EPS).
For example, if a company has an EPS of $1$ and pays out $0.50$ in dividends, the payout ratio would be 50%. This means that 50% of the company's profits are paid out to shareholders through tips. Another way to think about it is like a company's "sharing plan" or "sharing jar" with its shareholders. The payout ratio tells you what percentage of the company's profits they share with their shareholders as dividends.
A lower payout ratio may indicate that a company is keeping a more significant portion of its profits to reinvest in growth or to build up cash reserves. A higher payout ratio may suggest that the company returns more of its earnings to shareholders.
Formula: Payout ratio for dividends = Total dividends / Net income
Conclusion
The dividend rate is the annual total projected dividend payments from an investment, fund, or portfolio. It also includes any extra non-recurring dividends that an investor may get during that time. The rate of dividend is fixed or changeable, depending on what the company wants and how it wants to do business. The dividend rate and dividend yield are two terms that are often used interchangeably.
FAQs on What Is Rate of Dividend? Easy Formula & Examples
1. What is the rate of dividend in simple terms?
The rate of dividend is the percentage of profit a company pays out to its shareholders, calculated based on the face value (or nominal value) of a share. It represents the return a shareholder receives on the original value of their shares, as declared by the company's management.
2. What is the formula to calculate the rate of dividend?
The rate of dividend is calculated using the following formula:
Rate of Dividend (%) = (Annual Dividend per Share / Face Value of one Share) × 100
This formula tells you the dividend as a percentage of the share's nominal value, not its current market price.
3. Can you provide a simple example of calculating dividend income?
Certainly. Suppose you own 200 shares of a company. The face value of each share is ₹10, and the company declares a dividend at a rate of 15%.
- First, find the dividend per share: 15% of ₹10 = ₹1.50 per share.
- Next, calculate your total income: 200 shares × ₹1.50/share = ₹300.
Your total dividend income from these shares would be ₹300 for the year.
4. What is the difference between the 'rate of dividend' and 'dividend yield'?
This is a crucial distinction for investors. The key difference lies in the value used for calculation:
- Rate of Dividend: Calculated as a percentage of the share's Face Value. It is set by the company and indicates its payout policy.
- Dividend Yield: Calculated as a percentage of the share's Market Price. It reflects the actual return on investment for an investor who buys the share at its current market price.
A company might offer a high rate of dividend, but if its market price is very high, the dividend yield could be low.
5. On what value is a company's dividend always calculated: face value or market value?
A company's dividend is always calculated on the face value (also known as nominal or par value) of a share. The market value, which fluctuates based on demand and supply, is used to calculate the dividend yield or the actual return on investment, but not the dividend amount itself declared by the company.
6. Why do dividend rates vary so much between different companies?
Dividend rates vary due to a company's financial strategy and growth stage:
- Mature Companies: Established companies in stable industries (like utilities or consumer goods) often have consistent profits but fewer opportunities for rapid growth. They tend to pay higher dividends to distribute profits to shareholders.
- Growth Companies: Newer companies, especially in technology, typically reinvest all their profits back into the business for research, expansion, and capturing market share. Therefore, they usually pay very low or no dividends.
7. Is the 'dividend' in finance related to the 'dividend' in a mathematical division problem?
No, they are two completely different concepts that happen to share a name. In finance, a dividend is a portion of a company's profits distributed to its shareholders. In arithmetic, a dividend is the number that is being divided by another number (the divisor). There is no mathematical connection between them.
8. What does a consistently high rate of dividend suggest about a company?
A consistently high rate of dividend generally sends two important signals to the market. Firstly, it suggests that the company's management is confident in its ability to generate stable and predictable cash flows in the future. Secondly, it can also indicate that the company is mature and has limited high-growth projects to invest in, choosing instead to return capital to its shareholders.
