This dividend calculator is a simple tool that lets you calculate how much money you will get from a dividend when you invest in a dividend-paying stock. This dividend calculator also serves as a dividend reinvestment calculator or DRIP calculator (Dividend ReInvestment Plan).
In this article, you will find out what a dividend is and how to calculate dividends. We'll also walk you through a simple dividend example to demonstrate how to use our tool.
What is a dividend? – Dividend definition
A stock dividend, or dividend for short, is a payment made by a company to its shareholders. Dividend payments are usually made from the corporation's profit, i.e., the company chooses to share parts of its profits with its investors. Dividends are one of the ways an investor can earn a return on stocks. On the other hand, not all stocks pay dividends – if your main focus is investing for dividends, you will want to specifically seek out dividend stocks.
In most stock markets – including the United States and European Union – dividends are usually paid out every quarter to coincide with fiscal quarters. However, as capital markets tend to have a lot of variety, some companies may pay monthly or annual dividends. Moreover, a publicly traded company is not required to pay dividends. On the other hand, a private company may also choose to reward its stakeholders with dividends and share a portion of its profits.
The essential, unchanging part of the dividend definition is that dividends are paid out per share of the stock. For example, if a company pays out $5 dividends quarterly, and you own 20 shares in this company, you will receive $100 in dividends quarterly.
How to calculate dividend yield? – Dividend yield formula
Now that you know "what is a dividend", let's go into more detail. The thing about stocks is that they can vary greatly in value – some may cost a couple of dollars while others reach prices in the hundreds. We also know from the dividend definition that dividends are paid on a per-share basis. This would make comparing dividends hard; investing the same amount of money in two different dividend-paying stocks can result in vastly different returns on investment depending on the stock price, even if the amount of paid dividend is the same.
That is where the dividend yield formula comes in handy. This equation is a practical measure that expresses the annual amount of how much you get back towards your original investment as a percentage, making comparisons easier. You could also describe the dividend yield as the ratio of a company's annual dividend to the company's share price. Check below to learn how to calculate dividend yield:
dividend yield [%] = annual dividend / stock price × 100
There is another reason why the dividend yield value is useful. As it is a percentage value, we can use the dividend yield value to calculate dividend payouts in the same way we would calculate the interest rate.
Feel free to check out the dividend yield calculator for a somewhat different approach to this quantity.
How to calculate dividends – Dividend reinvestment calculator
When buying stocks, and those specifically with dividend payments, it is common practice to reinvest – i.e., buying even more shares with the money you get from the dividends. That is why some people may refer to the dividend calculator as dividend reinvestment calculator. Some companies also offer DRIP opportunities (dividend reinvestment plans). In such cases, instead of getting dividends from the company, it automatically gets reinvested into more shares, hence the other name of our tool – the DRIP calculator.
The other, more important, implication when reinvesting is that dividends are compounding, meaning they are added back to the initial invested amount. In simple terms, it means that if you use your dividends to buy even more shares, you will receive a greater amount the next time your dividend pays out because you have more shares, and so on. This allows us to calculate dividends by using the mathematics already set out when calculating compound interest.
In this case, the formula for dividend reinvestment is as follows:
- – Future value of the investment, in our calculator, it is the final balance;
- – Money invested or initial balance (the value of the investment);
- – Dividend yield (in decimal form);
- – Number of times the dividend is compounded per year (compounding frequency); and
- – Numbers of years the money is invested for.
If those calculations seem a bit overwhelming, fear not. This is what our calculator is here for! In the next section, we will show you how to calculate dividend payouts step by step. You might also be interested in our APY calculator, which calculates annual interest yield.
How to calculate dividend payout – dividend example
In the paragraph below, we present a quick explanation of the variables used in our calculator:
- Share price is the price of a single share in a company.
- Annual dividend per share is the amount paid out yearly per share.
- Dividend yield is the ratio of the annual dividend to share price.
- Money invested is the total amount of money invested in shares of the company.
- Number of years is the duration of the investment.
- Compound frequency means how often the dividends are added to the money invested.
- Final balance is the total sum of money at the end of the investment.
- Profit from dividends is the amount of money gained from company payments.
Let's see how to calculate dividend payout with this dividend example: assume you want to invest $1000 in a dividend-paying stock for two years. The dividend is compounded yearly, meaning it is added each year and used to buy new stock.
Sometimes you know the dividend yield immediately, making the task easier. Other times you have to calculate it using the dividend yield formula. For a refresher, check the how to calculate dividend yield section above. Let's assume our share price is $50 and the annual dividend is $3.50.
This would make the dividend yield:
dividend yield = $3.50 / $50 = 0.07
Finally, entering all the variables into the dividend reinvestment formula:
final balance = $1000 × (1 + 0.07/1)^(1 × 2) = $1,144.90
This means that investing $1000 with a 7% dividend yield would result in a $144.90 profit after two years and a total of $1,144.90, assuming all the dividends after each year goes into buying additional stock.
How to choose dividend stocks?
We are going to cover 3 points for picking dividend stocks:
Pick a company with a stable and growing free cash flow (FCF). Remember that dividend companies take a percentage of their net income (the free cash flow) to pay the shareholders. Consequently, the more the FCF, the more dividends you could receive. The free cash flow calculator can give you more information on that.
Select companies with low or non-existent net debt. The company could grow dividend payments faster if it has little or no financial obligations.
Pick dividend companies that trade at a discount price. You can use the graham number calculator, which finds the stock's fair value. Usually, companies that trade at low prices have some problems. Be sure none of those are related to debt repayment capability or lack of free cash flow.
How much do I need to invest for living from dividends?
Here's how to calculate how much you need to invest to live off the dividends:
Determine your monthly expenses. Multiply it by 12, so you get your yearly expenses. As an example, suppose you need 12,000 USD/month (so 144,000 USD/year).
Calculate the total portfolio value by dividing your yearly expenses by the dividend yield. Suppose you get a 10% dividend yield – you'd calculate 144,000 / 0.1.
You've found how much you must invest! You require a portfolio of $1,440,000 to produce a 12,000 USD/month dividend on a 10% dividend yield.
What is a good dividend yield?
5% and above is a good dividend yield. Also, consider these recommendations:
- Buy dividend companies that have reported dividend growth through the years.
- Aim for dollar-cost averaging your position when the stock price falls to increase your dividend yield.
- Be careful of high-paying dividend companies. Always verify if such payments are sustainable.
How do you calculate dividend yield?
You can use Omni Calculator's dividend tool or follow these steps:
- Find out how much dividends per share the company pays annually.
- Divide such an amount by the stock price. Multiply it by 100.
- There – you have your dividend yield in percent. Notice you can increase the yield by buying the stock at lower prices.
How do your choose dividend stock companies?
To choose a good dividend-paying stock:
- Check the overall market situation: Is the sector/industry you are checking on an expansionary cycle? Avoid investing in sectors that are shrinking.
- Check the financials of the companies so you can get a top-tier company: You should consider the return on equity (ROE), free cash flow (FCF), dividend payout ratio, debt ratios, and dividend growth.
- Wait for a price decline to buy the stocks.