There are two types of stock: those that pay dividends and those that don’t. Dividends are great; they’re an extra income source in addition to the increased price of the stock you have invested in.
You can treat dividends as the company’s appreciation of your trust. You bet your money on them, and now, when they are doing well, they pay out dividends.
But how do you model a portfolio when you invest in stock dividends? Well, now you can do it with our simple cash dividend calculator.
Our dividend income calculator can help estimate your earnings. Input your portfolio details to understand potential dividend income and how it fits your financial goals.
Cash Dividend Explained
A cash dividend is a payment made by a company to its shareholders, typically from its profits. As an investor, you receive dividends as a reward for investing in dividend-paying stocks.
This income can be a significant part of your investment strategy. Dividend payouts vary based on company performance and policies. The board of directors decides the amount to be distributed to shareholders.
These payments can usually be quarterly, semi-annual, or annual.
Receiving a cash dividend can be a steady source of income, especially with dividend aristocrats — companies known for consistent dividend growth.
You can reinvest these dividends through a dividend reinvestment plan (DRIP).
This plan allows you to buy more shares, increasing your portfolio value. It’s an effective way to benefit from compound growth.
Your annual dividend income is influenced by the dividend yield on cost and the holding period of your investments.
Higher dividend yields typically provide more income than the stock’s market price.
A company’s payout ratios shed light on the sustainability of its dividends.
Low payout ratios indicate the company retains more earnings for expansion, while high ratios might signify a priority on returning profits to shareholders.
Cash Dividend Calculation Formula
We need to break it down into the following steps to calculate dividends.
First, we need to calculate the dividend yield %:
Dividend Yield % = Annual Dividend Per Share / Price Per Share × 100Where
- Annual Dividend Per Share: How much dividend each share pays
- Price Per Share: The price of the single share
Once we have this information, we can calculate the future value of our portfolio and the amount of dividends.
Use the following formula:
FV = TI * (1 + DI / CF)(CF * NY)Where:
- FV: Future value of the investment
- TI: Total investment you are making now
- DI: Dividend yield %
- CF: The compound frequency of the investment, yearly—1, half-yearly—2, monthly—12, etc.
- NY: Number of years you are investing for
This is the formula used to calculate dividend reinvestment plan (DRIP), where you essentially reinvest the money back into stock to get even more compounding dividends.
Cash Dividend Example Calculation
To calculate your cash dividend, let’s imagine the following example:
- Price per share: $20
- Annual dividend per share: $2
- Distribution frequency: Quarterly
- Total investment: $10,000
- Number of years: 5 years
You’ll first calculate the total annual dividend yield:
Dividend Yield = $2 / $20 = 10%Next, let’s calculate the future value of your portfolio over the next 5 years:
Future Value = $10,000 * (1 + 0.01) (4 * 5)
Future Value = $10,000 * 1.0120
Future Value = $16,386.16The future value of your current investment is $16,386.16.
This means that from an original investment of $10,000, you will earn $6,386.16 on dividends over the next five years, making your overall portfolio growth 63.86%.