Buying the best dividend paying stocks can help investors create some passive cash flow. It is fast and effective, as long as you have enough money to make it worthwhile.

But how can you estimate how much you will make from dividends from a stock? Well there are a couple different formulas that people use to help them solve this problem.

The easiest and most effective way is by looking at the dividend yield ratio. The dividend yield tells an investor what percentage of the stock the company has paid out in dividends in the past. It is very easy to use and can work very well.

If the dividend yield is 4% then an investor would expect to make about 4% of their invested money back every year just in dividends. So if an investor puts $100,000 into the stock they would expect to make an extra $4,000 a year off of dividends.

This is a very simple formula; the only problem is that it works best if the stock stays flat. If the stock goes up or down then it becomes less accurate. For example if the stock goes down and dividends decrease so will the amount an investor makes in dividends. It also works on the upside, if a stock goes up and the dividends increase so does the income.

Another method of calculating dividends is by using something called the Gordon growth model to get an idea on how much dividends a stock is likely to pay out in the future based on it’s dividend growth.

However this can be a little missleading because it is hard to figure out exactly what will happen in the stock market.

Dividends can be useful, but they are not the only way to make money from the stock market, the appreciation of the stock can usually be much more profitable so it is worth it to take a look at the quality of the company.