Dividend Yield Formula

Dividend Yield Formula

Dividend yield may be calculated by the following formula

Dividend Yield = Dividend

                        Market Price

Example

Dividend =6

Market Price = 25

Dividend Yield?

Solution

Earning Yield = 6

                      25

= 24%

Gordon Dividend Growth Formula

Gordon Dividend Growth Formula

Gordon Dividend growth model is based on the concept of reinvestment of retained profit. It is believed that retained profit will be reinvested, which will result in dividend growth. This Growth is presented by following Formula

g=Br

Where

g=Growth

B= Proportionate of profit retuned

r= Return on equity

Gordon Dividend Growth Model Example

Number of Share = 100,000

Net Asset= 200,000

Market Value = 3

Dividend Paid= 30,000

Post Tax profit = 50,000

Calculate cost of equity and Dividend Growth?

Solution

1.    Dividend Growth

Return on Equity = Profit Post Tax       

                             Net Asset

Return on Equity = 50,000       

                             200,000

Return on Equity =     25%

                            

Profit Retained= 20,000       

                         50,000

=40%

Growth = 40% x 25%

= 10% (Growth)

2. Cost of Equity

Cost of Equity =[ Do ( 1+g) ] +g    

                         Share Price

= Cost of Equity =[ 30,000 ( 1+10%) ] + 10%  

                              100000x 3

= 21%

Dividend Free Cash flow Formula

Dividend Free Cash flow Formula

Dividend and Free cash flow has close relationship. Company can pay dividend, if it has sufficient free cash in the till. Therefore free cash flow is important monitoring tool for dividend policy. Dividend to free cash flow ratio can be calculated by the following formula

Dividend free cash Flow Ratio =           Dividend for Year    

                                                          Free Cash flow

Example

Company ABS has paid following dividend from 2001 to 2005.

Year              Earnings                      Dividend                  Free cash Flow

2001             100                             20 million                40 million

2002             100                             40 million                80 million

2003             100                             30 million                60 million

Solution

Year                    Dividend                 Free cash Flow       Dividend /Free cash Flow

2001                   20 million                40 million                20/40 =50%

2002                   40 million                80 million                40/80 = 50%

2003                   30 million                60 million                30/60 = 50%

Above example clearly shows that company is more focusing on cash flow for dividend decision than earning as dividend is 50% of free cash flow in each year.

Constant Dividend Growth and Share Price

Constant Dividend Growth and Share Price

Share price can be calculated by from the by discounting future dividend. The following formula is used for discounting the future dividends.

Share Price = Do ( 1+g)        

                      Ke-g

Do=Current Dividend

Ke =Cost of equity

g= Dividend Growth

Example

Current year dividend = .7

Dividend Growth Expectation = 6%

Cost of equity=12%

Solution

Share Price = Do ( 1+g)        

                      Ke-g

Do=Current Dividend

Ke =Cost of equity

g= Dividend Growth

Share Price = .4(1+6%)

                     12%-6%

Share Price = .4(1+06)

                       .06

Share Price = 7.066

Constant Dividend Share Valuation Formula

Constant Dividend Share Valuation Formula

Constant Dividend means that there is no growth in the dividend. It means company is same dividend

Year 1       10

Year 2       10

Year 3       10

In case of dividend, share price can be valued by following formula

Share Price =            Constant Dividend

                                 Cost of Equity

Example

Dividend is 20 cent

20 year Dividend Expectation = 20 Cent

Cost of equity = 12%

Solution

Share Price = Constant Dividend           

                        Cost of Equity

Share Price = .2

                    .12

Share price = 1.667

Negative Dividend Growth Formula

Negative Dividend Growth Formula

Negative Random dividend growth means that dividend has come down in relation to previous year. It means that negative growth of dividend is possible. The concept has been explained below with example

Growth =            Dividend during the year    

                            Dividend of Last Year

Example

Company ABC has paid following dividend

Year 1          12

Year 2          18        

Year 3          15

Solution

Year                              Growth

Year 1          12

Year 2          18/12         = 50%

Year 3          15/18         =(16.67)%

In above example dividend growth in year three has become negative in relation to year 2. It is important to note that this negative growth many also turn positive again.

Random Dividend Growth Formula

Random Dividend Growth Formula

Growth of dividend can be calculated by dividing current dividend with last year dividend. It is important to note that there are three types of growth i.e. Constant Growth, Random growth and negative Growth. Random growth means that dividend is not following a trend.

Growth =            Dividend during the year    

                            Dividend of Last Year

Example

Year 1          10

Year 2          11        

Year 3          14

Year 4          16

Solution

Year                              Growth

Year 1          10

Year 2          11/10         = 10%

Year 3          14/11         = 27.27%

Year 4           16/14        = 14.28%

Dividend Payout Formula

Dividend Payout Formula

Dividend payout ratio can be calculated by dividing the dividend with earning. Dividend payout ratio is simply explains that what percentage of profit is being distributed among the equity holder.

Dividend Payout Ratio =            Dividend during the year    

                                                     EPS or Earning

Example

Company A Dividend = 30 cent

Earning of Company A= 50 Cent

Company B Dividend = 40 Cent

Earning of Company B= 50 Cent

Calculate Payout ratio for both companies?

Solution

Dividend Payout Ratio =            Dividend during the year    

                                                     EPS or Earning

Company A = .3    

                     .5

=60%

Company B = .4    

                     .5

=80%