How do companies calculate dividends?
There is no set of rules that dictates how a company determines how much dividend to pay. Each company sets it own dividend policy. It is important to understand the dividend payout strategy of the stocks you own.FeaturesThe amount of dividend a company elects to pay is determined by the corporation’s board of directors. The board can increase, decrease or eliminate the dividend based on the financial results of the company’s business.ConsiderationsThe best way to evaluate a company’s dividend policy is to review the historical dividend in relation to the net earnings per share. Some companies pay a steady or increasing dividend, and others will fluctuate the payout with changes in earnings.CalculationsThe payout ratio is the dividend amount dividend by the net income. If a company pays a $1.00 dividend and income is $2.00, the payout ratio is 50 percent. A low payout ratio indicates the company has room to increase the dividend in the future if earnings stay the same or grow.Potential
