How to Calculate Dividends
Simply put, dividends are the return on an investment. There are two types of dividends: the gross dividend yield and the net dividend yield. The former comes before expenses such as taxes, while the latter comes afterwards. Both gross and net dividend yields are used to compare investments like mutual funds. In general, the net dividend yield is most important to an investor because it represents the true return on an investment. Two investments might have identical gross dividends, for example, but one may be far superior to the other due to higher net dividends. In that scenario, the increased net dividends would be the result of far fewer expenses. Calculating both gross and net dividend yields is a very simple process. Read below for steps on how to calculate both.
Regardless of what sort of investment you are analyzing, you must break it down into its most basic parts. For a mutual fund, for example, you will look at each individual security. List the payouts for each security, and divide each by the market price at the time. It is important the dividend and market price are from the same time period or else the calculation will be worthless. Simply add up the resulting numbers to obtain the gross dividend yield. To calculate net dividends, simply subtract the total expenses from each security from the gross dividends.
Gross and net dividends are usually used together when analyzing the value of an investment. Almost all experts will tell you the latter is most important, however, as it takes expenses into account. Gross dividends do provide information on how well an investment has performed, but net dividends give this information plus an idea of how a particular fund is managed and how much this costs. In the end, investors really only care about their bottom line net gains.
