The termdividends per share (DPS) refers to the total dividend a company pays outover a 12-month period, divided by the total number of outstanding shares. A company uses this calculationto share profits with its shareholders. DPS can indicate how profitable a company is over a fiscal period and it can tell an investor about the company's past financial health and its current financial stability.
Key Takeaways
- Dividends per share (DPS) is an important financial ratio in understanding the financial health and long-term growth prospects of a company.
- A steady or growing dividend payment by a company can be a signal of stability and growth.
- A declining DPS may be due to reinvestment in a firm's operations or debt reduction, but may also indicate poor earnings and be a red flag for financial hardship.
What Dividends Per Share Tells You
DPS is an important metricto investorsbecausethe amount a firm pays outin dividends directly translates to income for theshareholder, and the DPS is one of the most straightforward figures an investor can use to calculate his or her dividend paymentsfrom owning shares of a stock over time. Meanwhile, agrowing DPS over time can alsobe a sign that a company's management believes that its earnings growth can be sustained.
For example, suppose company ABC had a DPS of 60 cents last year, but this year, it doesn't paya dividend to its shareholders. This can signal to investors the company may be in poor financial health and cannot withstand the current market conditions. A decrease in DPS can thus cause investors to sell their stake in the company, driving the market value of ABC down further.
However, a decrease in dividend per share does not always signal a company is not financially stable. For example, suppose ABC did not pay out a dividend to its shareholders because it is using its profit to reinvest into the company to create a new product. This reinvestment into the business can potentially produce higher dividends in the long term.
How to Calculate Dividends Per Share
Dividend per share is the sum of declared dividends issued by a company for every ordinary share outstanding. The figure is calculated by dividing the total dividends paid out by a business, includinginterim dividends, over a period of timeby the number of outstandingordinary sharesissued. A company's DPS is often derived using the dividend paid in the most recent quarter, which is also used to calculate thedividend yield.
DPS can be calculated by using the following formula, where the variables are defined as:
DPS=SD−SDwhere:D=sumofdividendsoveraperiod(usuallyaquarteroryear)SD=special,one-timedividendsintheperiodS=ordinarysharesoutstandingfortheperiod
Example
Suppose company YXZ has been paying a steady dividend of 90 cents per share. The next year, company YXZ raises its dividend to $1.10 per share. This signals the company is financially stable and performing well in its current market condition. An increase in DPS also signals the management team is confident in the company's future profits.
FAQs
DPS can indicate how profitable a company is over a fiscal period and it can tell an investor about the company's past financial health and its current financial stability.
What does dividend per share tell investors? ›
Dividend Per Share (DPS) is the total amount of dividends attributed to each individual share of a company's outstanding stock. Calculating the dividend per share allows an investor to assess how much money he or she will receive from the company on a per-share basis.
What does the dividend yield tell an investor? ›
Dividend yield is a ratio that shows you how much income you earn in dividend payouts per year for every dollar invested in a stock, a mutual fund or an exchange-traded fund (ETF).
How do dividends benefit investors? ›
First, they provide a regular income stream, which can be especially attractive to income-focused investors such as retirees. Second, dividends are often seen as a sign of a company's financial health and stability, as they indicate that it's generating enough profits to distribute at least some to shareholders.
What do dividends tell us? ›
Paying dividends sends a clear, powerful message about a company's future prospects and performance, and its willingness and ability to pay steady dividends over time provides a solid demonstration of financial strength.
What is a dividend per share for dummies? ›
Dividends per share (DPS) is the number of declared dividends issued by a company for every ordinary share outstanding. It is the number of dividends each shareholder of a company receives on a per-share basis. Ordinary shares, or common shares, are the basic voting shares of a corporation.
Why is dividend per share important? ›
Dividends per share (DPS) is an important financial ratio in understanding the financial health and long-term growth prospects of a company. A steady or growing dividend payment by a company can be a signal of stability and growth.
Why is dividend yield important to investors? ›
The dividend yield shows how much a company has paid out in dividends over the course of a year. The yield is presented as a percentage, not as an actual dollar amount. This makes it easier to see how much return the shareholder can expect to receive per dollar they have invested.
Why is dividend cover important to investors? ›
Dividend coverage is an important risk metric for equity analysts and investors, spotlighting a company's ability to pay dividends to its shareholders. The dividend coverage ratio (DCR) serves as a crucial metric to gauge how secure a dividend payment.
How do dividends impact the value of a share of stock? ›
After a stock goes ex-dividend, the share price typically drops by the amount of the dividend paid to reflect the fact that new shareholders are not entitled to that payment. Dividends paid out as stock instead of cash can dilute earnings, which can also have a negative impact on share prices in the short term.
What Is a Dividend Payout Ratio? A dividend payout ratio is a useful metric that reveals a dividend's sustainability. It measures the percentage of net income that goes to the dividend program. Shareholders receive these profits, which they can accept as cash or reinvest into additional shares.
What does a dividend indicate? ›
Dividends are payments companies make to reward their shareholders for holding on to their stock. They represent a portion of a company's profit and can be paid in cash, stock, or some other property.
What does a dividend show? ›
A dividend is a payment that a company chooses to make to shareholders when the company has a profit. Companies can either reinvest their earnings in themselves or share some (or all) with its investors. Dividends represent income for investors and are the primary goal for many.
What does a high dividend per share indicate? ›
The board determines it based on the EPS. It is calculated by dividing the total dividend by outstanding shares. A rising DPS indicates the company's strong financial performance and that the company is willing to distribute the profits to its shareholders.
Is it better to have higher or lower dividends per share? ›
Dividend Per Share Analysis
The DPS calculation is an accurate way to tell how much the shareholders will get paid. However, looking at the trend of dividend payments can tell us a lot about that specific company and its growth. The higher the dividends from the company, the better they are projected to do.
What is a good dividend per share ratio? ›
So, what counts as a “good” dividend payout ratio? Generally speaking, a dividend payout ratio of 30-50% is considered healthy, while anything over 50% could be unsustainable.
What does a stock dividend indicate? ›
Stock dividends are payments a company makes from its overall profits to shareholders as a reward for their investment. Dividends are most commonly paid to shareholders as cash dividends but are occasionally paid out as additional shares of stock.
