What is an indicated dividend?
A stated dividend is the estimated amount of cash dividends that will be paid on a share over the next 12 months based on the dividends that have been paid in the past. It is a projection or estimate of future earnings potential based on the company’s history of paying dividends.
Key points to remember
- A stated dividend is an estimate of the amount of dividends that will be paid over the next 12 months based on the company’s past dividend payments.
- A stated dividend may be based on the most recent annualized dividend, the previous year’s dividends projected to the next year, or past dividends adjusted for a growth or contraction factor.
- Knowing the indicated dividend helps investors estimate their income stream, allowing them to create or rebalance their investment portfolio.
Understanding an Indicated Dividend
An indicated dividend, also called an indicated annual dividend (IAD), is the estimated amount of total dividends on a stock for the coming year. The dividend shown is based on the assumption that the company will continue to make payments equal to the most recent payment.
In other words, an indicated dividend is the most recent quarterly dividend annualized.
If a company pays quarterly dividends, the dividend shown for the next 12 months is the most recent quarterly dividend multiplied by four. If the dividend is monthly, multiply the dividend by 12. For semi-annual and annual dividends, multiply the most recent dividend by two or one, respectively.
An investor could also take the sum of dividends over the past 12 months and then project that amount into the future. For example, if a company has paid out four dividends in the past 12 months, adding up those dividends indicates what next year’s dividends could be.
If a company has a policy of constantly increasing or decreasing dividends, this could also be taken into account in the calculation. Supposing dividend growth in the future can lead to unmet expectations if growth does not occur.
Regardless of the method used, an indicated dividend cannot predict the future. This is an estimate of what the 12-month dividend payout might be, but could differ significantly from what actually unfolds.
Why an Indicated Dividend Matters
A stated dividend tells investors what annual cash yield they can expect from dividends over the next year. Once an investor knows the IAD of a stock, they can then compare it with other stocks in order to make investment decisions. Or, they can compare the IAD with the returns of other securities, such as bonds. Knowing the indicated dividend is useful when strategizing your investments or rebalancing wallet.
The indicated dividend is also used in the calculation of the dividend yield and the payout rate. For example, a payout ratio can be calculated by taking the stock’s IAD and dividing it by the last 12 months earnings per share (EPS).
Calculation of an indicated dividend
The indicated dividend can be calculated using a number of methods, as discussed above.
- A projected methodology that annualizes the most recent regular cash dividend.
- A historical methodology that assumes that the most recent 12-month dividend amount will also be paid over the next 12 months.
- A projected methodology where recent dividend growth or contraction is expected for the next 12 months.
Dividend Indicated = Frequency of Dividend Payment x Amount of Most Recent Cash Distribution
Apple (AAPL) paid four dividends in 2019:
- February: $0.73
- May: $0.77
- August: $0.77
- November: $0.77
- Payment frequency = Quarterly (4)
Dividend indicated = $0.77 x 4 = $3.08
Dividend shown = Sum of cash distributions over the last 12 months
In the case of Apple, discussed above, add up the 12 months of dividend payments to get the dividend shown for the next 12 months.
Dividend shown = $0.73 + $0.77 + $0.77 + $0.77 = $3.04
Projected methodology with growth/contraction
Dividend shown = Most recent dividend x Average growth or contraction
In Apple’s case, the most recent dividend posted was $0.77. In several 12-month periods in the past, Apple has increased its dividend by around 10%. Between 2018 and 2019, the dividend went from $0.73 per quarter to $0.77, an increase of 5%.
A conservative estimate is to assume that the dividend will remain at $0.77 per quarter or $3.08 for the next 12 months.
A more aggressive estimate is to assume 5% growth, which would indicate a dividend of $0.8085 ($0.77 x 1.05), or $3.234 per year.
An even more aggressive estimate is to assume 10% growth, indicating a quarterly dividend of $0.847 or $3.388 in annual dividends.
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