Why Performing a Dividend Payout Ratio Analysis Regularly Can Save Money

Understanding how dividend payout ratio analysis is calculated can be confusing for some inexperienced investors, and requires a strong knowledge of bookkeeping and accounting. Smart investors regularly do a dividend payout ratio analysis to determine the performance of a company. They also look at the balance sheets and the annual report in order to make a clear assessment of the viability of the dividend payout ratio.

The Basics You Will Need

In order to complete a dividend payout ratio analysis it is necessary to look at the balance sheets, income statements, shareholders equity statements and cash flow statements for the last 3 to 5 years. Determine if there are any large transactions or revenue jumps from year to year. Also look at the fixed or total assets, and if there are any questions, contact the company to find answers. For example, did the company grow and start a new division or did they sell part of their operations to another company?

Looking at the Dividend per Share Payout

The next step in a dividend payout ratio analysis is to look at the dividends per share. This is the product of return of a shareholder’s equity. To determine this, the value of each share is compared with the price and the earnings and dividend yield. This can then be encapsulated into an easy to visualize format. For example, by entering the information on the dividends, the profits after taxes, the capital, the number of shares and the price per share, the yearly numbers can be compared side by side.

The Types of Dividends for Shareholders

The dividend payout ratio analysis should be stock dividends or cash dividends. Stock dividends are given to shareholders in proportion to their holdings. These earnings are capitalized and increase the amount of shares the investors own. A cash dividend provides investors with a cash payout usually paid quarterly. This is done by using a percentage of the face value of each share. For example, if a company shareholder has $100 in shares with a 10 percent dividend payout ratio, they will receive a cash dividend of $10.

Why Performing a Dividend Analysis is Important

Over time companies change and grow or fail. Performing a regular dividend payout ratio analysis can help to determine which companies are strong and which are weak. It can also help investors determine when to buy or sell shares. Public companies have the information needed to perform an analysis and are available to answer any questions. This public record information is beneficial to them and to their shareholders. By being proactive and watching for unusual financial transactions within a company, it is possible to be a smart investor.

The dividend payout ratio is a basic financial calculation that can help investors find the best companies to work with. However, it is important to monitor any investments over time to find which ones are working and which ones are not.