Dividends are the primary way corporations reward investors who buy and hold their stock. If you're looking at investing in a company, regular dividends help you recoup the cost of investment. Studying the financial statements can give you an idea of the dividends to expect.
You find dividends issued during an accounting period on the cash flow statement. Dividends that haven't been paid out are listed as a liability on the balance sheet. By subtracting beginning retained earnings from the ending retained earnings and comparing the result to net profit, you can calculate dividends for the period.
The cash flow statement is one of the big three financial statements, along with the income statement and the balance sheet. Unlike the income statement, the cash flow statement only deals with actual cash transactions, such as bills paid off and money that customers paid you.
One section of the statement covers cash flow from financing activities by selling stock, issuing bonds or repurchasing outstanding stock, for example. Different financing activities cause cash to flow in or out of the company. With dividends, the cash flows out from the company's coffers to the stockholders.
Suppose you're looking at the statement of cash flow for the last year, for example. You look for cash flow from financing activities and discover the company issued $400,000 in bonds and $150,000 in new stock, and it paid out dividends of $75,000 to stockholders. If dividends have been declared but not issued, that's different: you won't find dividends payable in the cash flow statement.
You can find dividends payable on the balance sheet, which lists the corporate assets and liabilities and the owners' equity in the company. If any dividends aren't paid out by the end of the accounting period, they're listed among the liabilities.
It's also possible to see the effect of paid-out dividends on the balance sheet. Part of owners' equity is retained earnings, the profits that the company kept rather than used to finance dividends. For a more detailed look at retained earnings, go to the statement of shareholders' equity, also known as the statement of equity.
Shareholders' equity is what remains of the company's worth after you subtract total liabilities from total assets. The statement of shareholders' equity takes the retained earnings section of the balance sheet and goes into detail to track additions to and subtractions from earnings, including:
- Sales of stock, both common and preferred
- Treasury stock purchased or reissued during the accounting period
- Unrealized gains and losses
- The statement adds profits and subtracts losses from retained earnings. Suppose the company started the year with $1.5 million in retained earnings, for example, and ended the year with another $250,000 in earnings. That bumps retained earnings up to $1.75 million.
- The statement subtracts dividends. A $200,000 dividend cuts retained earnings back to $1.55 million.
The statement combines all these pluses and minuses to wrap up — at the end of the number crunching — with the total shareholders' equity for the period.
If you want dividend information on a company but you don't have the cash flow statement, you can extract the same information from the income statement and the balance sheet for the current and previous reporting periods.
- Subtract the retained earnings at the beginning of the year from the retained earnings at the end to show the net change over the year.
- Take the net profit figure from the income statement.
- Compare net profits for the period to retained earnings. If they're the same, no dividends were issued; if they're different, the difference is the dividend amount.
For example, suppose retained earnings at the start of the year were $1.5 million. At year's end, they're $1.75 million, a $250,000 difference. Net profits were $300,000, so that shows the company issued a $50,000 dividend.