Before understanding dividend per share, we need to learn what a dividend is. When a company makes a profit and gathers retained earnings, those earnings are then paid out to shareholders as a dividend. The value of the dividend is calculated on a per-share basis and is paid equally to all shareholders. However, the payment is first approved by the board of directors. A dividend is paid on a particular date called the payable date.
Now that you know what a dividend is, we can understand dividend per share better. The dividend per share is the total sum of the dividends issued for every ordinary share outstanding of a company. By calculating the dividend per share, the investor will know how much income he/she will receive from a company on a per-share basis. Now, let’s discuss Dividend Per Share in detail.
The Dividend Per Share (DPS) is determined by dividing the total dividends paid out by a company, including any interim payments, during a certain period of time, often a year, by the number of ordinary shares that are still outstanding and issued. The dividend per share calculator determines the portion of earnings that will be paid to shareholders. Dividend per share is also used to determine the stock’s dividend yield and can be applied for dividend growth stock valuation models.
What is this ordinary share that dividend per share keeps talking about? Ordinary or common shares are stocks sold on the public exchange. Each share of stock gives the owner voting right at a company shareholders’ meeting. Generally, owners of ordinary shares are not guaranteed a dividend as opposed to preferred shareholders. Preferred shares are a hybrid of a bond and a stock. Preferred shareholders are paid dividends before ordinary shareholders.
The dividend per share calculator provides a straightforward figure to an investor about the income he/she will receive as a dividend for every ordinary share outstanding. A constant increase in dividend per share over time provides confidence to investors that a company’s earnings growth might be sustainable.
Dividend Per Share Ratio (DPS) = (Total Dividends paid out over a period – Special Dividends)/ Shares outstanding
Or
Dividend Per share = Earnings Per Share X Dividend Payout Ratio.
Dividends over the entire year must be added to calculate DPS, including interim and final dividends and excluding special dividends. An interim dividend is paid out before the company’s Annual General Meeting (AGM) and before its final financial statements are published. Special dividends, however, are non-recurring, one-time dividends issued by the company. They are bigger dividends as compared to normal dividends. They are also called extra dividends.
For example, let’s assume XYZ Company paid a total sum of $230,000 in dividends over the last year. There was a special one-time dividend during that year as well in the amount of $49,200. XYZ has 3 million shares outstanding.
So, now we calculate the DPS = $230,000-$49,200/3,000,000 = $0.06 per share.
Dividend Yield is a ratio that tells how much a company pays out in dividends every year relative to its stock price. It estimates dividend only return of stock investment. If the dividend is not lowered or raised, the yield will increase when the stock price falls. Similarly, if the stock price increases, the yield will fall.
Dividend yield = (Dividend Per share/ Price Per Share) x 100
Dividend Payout Ratio
The Dividend Payout Ratio is the dividend amount paid to shareholders to the total sum of net income that a company generates. There are various formulas for calculating the dividend payout ratio.
A company pays a cash dividend to its shareholders for every ordinary share outstanding and it can be known as a cash dividend per share. They are paid on a per-share basis. Cash dividends per share are paid regularly, be it quarterly or yearly, as an interim dividend and final dividend respectively. However, they can sometimes be only one-time payouts after a legal settlement. The companies that are established, have a stable cash flow, and are beyond their growth stage are dividend-paying companies. Every company has a dividend policy, based on which it assesses if a dividend increase or cut is warranted.
Apart from usual cash dividends, there are other dividends that a company pays as well.
A stock dividend per share is paid to shareholders in the form of shares rather than cash. The company gives extra shares based on current shares held by shareholders on a pro-rata basis. These dividends are not taxed until the owner sells the shares granted to him by the company. Stock dividends do not affect the company’s value but can dilute earnings per share. The board of directors decides when the dividend will be declared and in what form the dividend will be paid. There are two types of stock dividends, small and large dividends. A small stock dividend is when the number of shares issued is less than 25%, contrary to large dividends, where the number of shares issued is more than 25%
A dividend is issued as a liquidating dividend by the company at the time of its liquidation. When a company liquidates, it is generally winding up its business and exiting the market. Liquidation can either be voluntary or involuntary. A liquidating dividend is also known as terminal distribution or liquidating distribution. The company liquidates all its semi-liquid and liquid assets to the shareholders. When a company cannot sustain its operations, it returns the assets to shareholders via dividend payments.
Bond dividends are akin to scrip dividends. The only difference is that a scrip dividend has a short maturity period and does not bear any interest. However, a bond dividend has a long maturity period and bears interest.
User | Indicator | Benefit |
Investor | Financial Health | Investors calculate DPS to get an idea of the company’s profitability, financial growth, and stability. |
Shareholder | Shareholder Value | Shareholders use DPS to calculate the portion of earnings paid out to them as an income. |
Quoted Company | Performance Signal | Companies that are publicly listed calculate DPS to share a portion of their retained earnings with shareholders through dividends and lure dividend-seeking investors. |
A company that pays a steady dividend per share sends a strong performance signal to its shareholders. That is why established corporations boast about their stable DPS growth.
For example, Britannia industries are one of the major Indian food manufacturing companies. It engages in manufacturing and selling FMCG products like bread, biscuits, cakes, etc. However, the majority of its revenue (80%) is generated from selling biscuits like Marie gold, good day, JimJam, etc. Britannia has a 400 bn business market in India. And it has been consistently paying dividends since 1995. The company has already paid 26 dividends in its lifetime period.
Every company has a dividend policy to structure dividend payouts to shareholders. There are three kinds of dividend policies – stable, constant, and residual.
A stable dividend policy is the most commonly used policy. This policy aims to have a predictable and steady dividend payout each year. This is what investors seek. It doesn’t matter if the earnings are high or low; the investor will receive a dividend. This policy aligns with the long-term growth of the company rather than the volatility of quarterly earnings. It assures the shareholders about the time and amount of the dividend. But an investor may not see a high dividend in a company’s boom years.
The residual Dividend policy is highly volatile. The company pays out the dividends left after it has paid for the working capital and capital expenditures (CAPEX). Although it is volatile, the investors still think of it as the only acceptable dividend policy because they don’t want to invest in a company that justifies its high debt.
Under the constant dividend policy, a firm pays a percentage of its earnings as dividends each year. Investors get to experience the whole volatility of company earnings. If earnings are high, the investor will get a large dividend; if the earnings are low, the investor might not receive any dividend. The only drawback of this policy is its volatile nature. As opposed to a stable dividend policy, investors under this policy enjoy increased dividends in highly profitable years of a company.
The topic will be incomplete if we do not discuss DPS’ counterpart EPS. Earnings per share (EPS) depicts the company’s net income allocated to each share of common stock. It reflects the company’s profitability and helps investors evaluate stocks.
Earnings Per Share (EPS) = (Net Income – Preferred Stock Dividends)/ Outstanding Shares
Earnings Per Share (EPS) | Dividend Per Share (DPS) |
Shows the company’s profitability by measuring net income for every outstanding share. | Shows the company’s profitability, a total sum of dividends issued by a company for every ordinary share outstanding. |
EPS does not indicate the amount the shareholder receives; it is an accounting figure. | It indicates the income a shareholder will receive per share as a dividend. |
EPS gauges how valuable an organisation is per share of its inventory. | Many growth firms don’t pay out dividends, so their DPS can’t be utilised. |
There are five types of EPS; Reported EPS, Ongoing, book value, retained, and cash. | There are six types of DPS; cash, bond, scrip, property, liquidating, and stock. |
DPS is a financial ratio that helps investors assess a company’s financial health, performance, stability, shareholder value, and long-term growth. A stronger dividend payout makes stocks attractive to investors, increasing their market value. For some investors, dividends are the primary determinant of buying stocks.
A decreasing DPS ratio indicates that a company’s financial health might be deteriorating. It may lead to investors selling their stake, driving the company’s stock price and market value down.
However, not always a downward DPS trend means that the company is going through financial difficulties. Instead, it may mean that:
There are some inputs to consider for comparing the DPS of different companies against each other.
Pros | Cons |
Easy to calculate and understand | It does not indicate the actual return on investment |
Practical; it shows shareholders’ income directly. | It does not indicate profit per share earned vs. distributed. |
Widely used to assess a company’s profitability. | Not all companies pay out dividends. |
A smart dividend investor is not interested in companies that are giving high dividends for just one year and unable to sustain similar dividends in the future. Instead, he looks for a company that pays stable dividends consistently for years without dividend cuts.
A recession or bad market should not prevent a good company from paying dividends to its shareholders. The calculation of dividend per share tells how profitable a company is. Generally, they are paid in cash, but if the company is low on cash, it can also pay in property, stock, bonds, scrip, etc. A good DPS attracts investors, and a low DPS leads an investor to sell its stakes.
A dividend is a part of the profit or retained earnings the company shares with its shareholders. It is a reward that a company shares in the form of cash, stock, property, etc. But if a company is low on cash, it can skip paying dividends. When a company issues dividends, they also release a date referred to as the payable date.
A good dividend per share does not have an absolute number as the companies may have different dividend policies. It depends on the investor as he might want a capital appreciation of his money rather than frequent dividends. However, a high DPS is good if an investor is dividend sensitive. A 2% to 6% is generally considered a good dividend yield ratio in the stock market.
The dividend cover ratio calculates the company’s earning capacity to pay the dividend. Divide the net income of the company by dividend paid during the year. If the dividend coverage is 1, the company has paid all the year's earnings. If it is greater than 1, it shows that the company has generated excess profit and can now pay dividends. However, if the dividend coverage is less than 1, the company has been unable to generate a profit for dividend payment.
In the event of a recession, a string of negative profitability, or other more serious dangers to the company's health, businesses may choose to reduce their dividend payments. On other occasions, the reduction may be more strategic in nature, with an eye toward future expansion or to provide room for buybacks.
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