- Publicly-owned companies are required to release periodic cash flow statements allowing investors to see how money flows into and out of the company. Calculating a company's dividend ratio does not directly tell you how dividends affect a company's cash flow. The cash flow statement, however, can tell you precisely how the dividends were paid and what impact this amount has on the company's cash flow.
- If a company has free cash flow, meaning it has cash left over after it has met it current obligations, it can use some of this money to pay investor dividends. If it does not have enough free cash flow, the company may borrow money to pay dividends or pay investors in additional stock shares instead of cash.
- A company's dividend yield is the ratio of dividends paid to shareholders based on the price of the stock. This ratio is calculated by dividing dividends per share by price per share. If a company uses free cash flow to pay dividends, cash is reduced by the amount of the dividend. The higher the yield, the more the company reduces free cash. If it borrows, it increases its debt obligation and future cash cash flow will be reduced when the company pays back its debtors. If the company issues a stock dividend, it does not impact cash flow, but it will reduce the dividend payout ratio.
- A company's dividend payout ratio measures the percentage of earnings distributed to stockholders in the form of dividends. This ratio is calculated by dividing dividends per share by earnings per share. If it pays a stock dividend, it reduces the dividend payout ratio, but does not impact cash flow. Yield is reduced because earnings per share is diluted by issuing additional stock. Like the dividend yield ratio, the higher the dividend payout ratio, the more free cash is reduced if the company pays dividends from cash, or the more future cash will be reduced if it borrows.
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