Dividend calculator is a simple tool that let's you calculate how much money will you 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 is a dividend 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
Stock dividend, or dividend for short, is a payment made by a company to its shareholders. Dividends 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 lots of variety, some companies may pay out dividends monthly or annually. What is more, 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 important, 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 come 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 that we would calculate interest rate.
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:
FV = P * (1 + r / m)^mt,
- FV - the future value of the investment, in our calculator it is the final balance
- P - the money invested or initial balance (the value of the investment)
- r - the dividend yield (in decimals)
- m - the number of times the dividend is compounded per year (compounding frequency)
- t - the 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 of money paid out yearly per share,
- dividend yield is the ratio of 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 a $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 right away, and it makes 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 total $1,144.90 assuming all the dividends after each year go into buying additional stock.