Financial question?

Question

Using the balance sheet and income statement, calculate the amount of dividends most likely paid to stockholders. How do you do this?

Answer 1

You have to look at various factors. Is the co. a new, growing co. or an old, well-established co.? Has it made enough profits to pay a dividend? Does it have the cash to pay a dividend? What is its dividend payment history like?

When a corporation earns a profit, there are essentially two things that can be done with it. The corporation can pay a portion of the profit to its owners (stockholders); this is referred to as a cash dividend. Another alternative for the company is to plow the profit back into its business to pay down debt, acquire other companies, etc.; in this case, we say the company is retaining its earnings.

The Board of Directors (the people charged with the broad oversight of the company) decides how much of profits is paid in dividends and how much is retained. This decision is affected greatly by how badly the company needs cash. It is common for fast growing companies to pay no dividends at all. After all, such companies need cash to help them expand their businesses while avoiding having to borrow huge sums of money. Companies in well-established, slow growth industries, on the other hand, are likely to pay big dividends since they have little need for the cash generated by their operations. Since the stocks of such companies provide the investor with a regular stream of fairly large dividends, they are often referred to as income stocks.

A common measure of the return an investor earns from the receipt of dividends is "dividend yield." Dividend yield is calculated by dividing dividends received per share by the current price of a stock. For example, if a stock was paying a dividend of $1 annually per share and the stock was currently selling for $10, its dividend yield would be 10% ($1/10). Actually, most companies pay dividends quarterly, so in the example just cited, the investor would receive 25 cents four times during the year.

Once a company begins paying a regular dividend (and hopefully increasing it by a small amount each year), the price of the stock will be affected adversely if for some reason (perhaps because of declining profits) the company lowers, or worst yet, discontinues the dividend.