How to Calculate Equity Income in 4 Easy Steps
Equity Income is calculated by adding up a shareholder’s dividend payouts for a year, along with the capital gains made from stock sales. This allows an investor to see if his investment strategy is effective or needs adjusting.
Here’s What We’ll Cover:
What Is Equity Income in Accounting?
Equity income is the total money received from two sources:
Stock dividends are payouts made in cash to a company’s shareholders on a quarterly or yearly basis. It’s a way for a company to distribute profit back to its investors. How much a shareholder receives in stock dividends depends on how many shares the individual or company holds.
Paying dividends is a good way to entice shareholders to buy more stock in a given company and to hold it long term as an investment. Stock dividends are usually offered by well-established, larger companies that have previously proven themselves, like Apple and General Motors.
As an alternative, sometimes stock dividends are given not in cash but in more stock. Investors can find out in advance of a stock purchase if a company offers dividends and how often they are paid out.
When a shareholder buys shares in a company, and later sells it, the profit realized from that share is considered a capital gain in the year in which it was sold.
Equity Income Calculation
When it’s time to calculate your Equity Income for the year, you need to round up some information first.
1. Review Your Investment Statements
Okay, pull those investment statements you received in the mail and have been dumping in a pile over the last few months (or have sitting in your email’s inbox unopened) and have a look. It’s time to put that information to use.
2. Add up Income from Dividends
Check to see if any of the companies you have shares in paid any dividends and if so, how much. You are not checking if the value of the stock has increased or decreased. For the purposes of this calculation, stock value doesn’t matter. What matters is only what was paid out to you, as a shareholder, in dividends. This will be a dollar figure and it was calculated based on how many shares you currently own.
Some companies pay dividends quarterly instead of yearly – so make sure you get all the numbers.
3. Add in Capital Gains
If you’ve sold stock in the last year, you’re going to need those numbers too. This is not the amount transferred into your trading account after you sold the stock, it’s only the capital gains you made by selling it. This is your profit, which is the difference in what you bought and sold the stock at. Now it’s possible you sold at a loss, and therefore there’s nothing to add up here.
4. Equity = Dividends + Capital Gains
Let’s do the math. Your total here will show how your investments are paying off for you. It might also cause you to reconsider your investment strategy.
Is Equity Income Taxable?
Equity Income is taxable. An Equity Income Calculation will give you a glimpse into how well your investments have done for you, but both dividends and capital gains are subject to tax. So that’s another thing to consider as it dips into your profits. For more information on tax rates as it applies to capital gains, check out the IRS’s Helpful Facts to Know About Capital Gains And Losses.