The concept of joint stock company, originated in Great Britain, during the industrial revolution, when the Joint Stock Companies Act was passed in the year, 1844. With creation of the Registrar of Joint Stock Companies Office, the common man was able to create the incorporated organizations. The common man was thus able to also contribute a common stock into such organizations, in order to reap benefits, or what we call today as ‘returns’ for the contribution of this common stock.
Eventually, on the basis of this Joint Stock Companies Act, 1844, many nations across the globe, passed the essential enactments to help people to start up companies and reap the numerous advantages, that tag along. Today, almost all the nations across the world have enactments for incorporation, or rather creation of companies. The returns that are paid back to the contributors of the joint stock are in the form of a ‘dividend’.
What is a Dividend
The joint stock companies, that are incorporated, raise their capital with help of a common or joint stock. It basically means, that after a company is incorporated, the promoters of the company or the board of directors invites ‘share application’ from the common public.
Share application is a partial amount of the share price that is paid by the applicants. Then, the share is allotted to the individuals and allotment is received by the company. Thus, the individuals become the shareholders of the company. These individuals, who are the shareholders are rewarded with what is known as dividends, at the end of the year, in accordance with the debt to capital ratio. These dividends are the returns of the shareholders over their shares.
Understanding the Ratio of Dividend Payout
Dividend ratio is basically the ratio between the amount of dividends that are paid, and the net income for that accounting and financial year. This ratio is expressed in the form of a percentage. Though the percent amount also exceeds 100%, in some cases, due to the fact that companies are sometimes also authorized to issue dividends that exceed the face value of shares.
The simple formula goes as follows:
Dividend Payout Ratio = Amount of Dividends Issued / Net Income of the Financial Year
It is to be noted that in cases where there has been an issue of bonus shares, the amount of bonus shares is added to the dividend, as theoretically, bonus shares are also a way of returns. It must be also noted that returns over preference shares are taken into consideration while doing the calculation.
An example, can be USD 50 dividend on a USD 100 (face value of share). The ratio in such a scenario becomes 50%. Nowadays, companies have started following a different method, while calculating the dividend ratio. Instead of considering the aggregates of total dividend and total income, early dividend per share and income for every share, is taken into consideration. For such a situation, the following formula can be bought into effect:
Dividend Payout Ratio = Yearly Dividends Issued per Share / Income and Earning per Share
This kind of ratio is a bit difficult to calculate as it involves an intricate knowledge of accountancy and bookkeeping. However, it is definitely advantageous to mention both types of ratios in the final accounts, balance sheets as well the annual report.
The average dividend ratio, of the past few years, is mentioned in most final accounts. And dividend ratio analysis is an important part of any balance sheet analysis, when investors sit down to estimate the performance of any company.