Financial Accounting: An Integrated Statements Approach, 2nd Edition

ANALYZE DIVIDENDS

Shareholders and analysts evaluate both the amountof dividends paid and the likelihood

that the dividends will be maintainedin the future. The dividend yield measures the

amount, while the dividend payout ratio can be used to evaluate dividend maintenance.

Dividend Yield

The amount of the cash dividend can be evaluated as a rate of return on the value of

an investment. This rate of return is called a dividend yield. Although the dividend

yield can be computed for both preferred and common stock, it is most often computed

for common stock. This is because most preferred stock has a stated dividend rate or

amount. In contrast, the dividend and market price of common stock normally varies

with the profitability of the corporation.

The dividend yield is computed by dividing the annual dividend paid per share

of common stock by the market price per share of common stock at a specific date, as

shown below.

Dividend Yield

Annual Cash Dividend per Share of Common Stock

Market Price per Share of Common Stock

To illustrate, the market price of Mattel, Inc., common stock was $18.89 as of the close

of business, January 10, 2005. During the past year, Mattel had paid dividends of $0.45

per share. Thus, the dividend yield of Mattel’s common stock is 2.38% ($0.45/$18.89).

Because the market price of a corporation’s stock will vary from day to day, its divi-

dend yield will also vary from day to day. Fortunately, the dividend yield is provided

with newspaper listings of market prices and most Internet quotation services, such as

from Yahoo’s Finance Web site.

The recent dividend yields for some selected companies are as follows:

Company Dividend Yield (%)

AT&T Corporation 5.06

Duke Energy Corporation 4.46

General Motors 8.10

Hewlett-Packard Company 1.05

Home Depot Inc. 0.82

Oracle Corporation None

The Coca-Cola Company 1.00

510 Chapter 11 Stockholders’ Equity: Capital Stock and Dividends

Common stock, $1.00 par value, 1.0 billion shares authorized;

441.2 million shares issued $ 441.2

Additional paid-in capital 1,594.8

Treasury stock at cost; 26 million shares (473.0)

Retained earnings 1,093.0

Accumulated other comprehensive loss (270.0)

Total stockholders’ equity $ 2,386.0

Mattel, Inc.

Stockholders’ Equity

December 31, 2004 (in millions)

Exhibit 7

Stockholders’ Equity

Section of the Balance

Sheet

Compute and interpret

the dividend yield and

dividend payout ratio on

common stock.

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