Finance

Dividend Per Share

Dividend Per Share

Dividend refers to the portion of the company’s net profit to its shareholders. It is typically presented in the form of cash, but it may also be in the form of stocks, cash, or bond. They are essentially profit-sharing procedures that allow businesses to transfer profits to their shareholders.

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What is Dividend Per Share?

Dividend per share (DPS) as the name suggests is the total dividends that a company has paid for each of its outstanding shares during a given period of time. This ratio represents the amount of dividend earned from the ownership of the shares of a specific company over a certain period of time. It may be used by individuals who assess different stocks and tend to invest in companies paying dividends. That being said, as some businesses keep their earnings for growth rather than paying dividends, the Dividend per share does not provide an overall outlook on a company. In a nutshell, for every outstanding share, there is, the dividend per share is the sum of the dividends declared. Dividends are a form of income for the shareholder and, thus, dividends per share is a single and basic measure for analyzing how much cash flow investors will receive.

How is it calculated?

Calculation of the dividend per share helps the investors to evaluate how much of the profits they will earn from the company on a per-share basis. Dividend per share is calculated by dividing the total dividends paid out including interim dividends by the outstanding shares for a given time.

The most significant aspect in the Dividends per Share Calculation is the “Number of Shares.” For the computation of the number of shares outstanding, the average outstanding shares can be calculated by using the simple average or the weighted average of the starting and ending shares. The other aspect is the Annual Dividend, namely the dividends charged to owners over the year, which does not contain any special dividends. This ratio helps in understanding the company’s financial health and long-term goals.

Example:

Company XYZ declares a total dividend of $10000 for the year and the total number of outstanding shares is 1000.

DPS = 10000/1000

= 10 per share

Hence, the dividend per share is $10

In case there is a special one-time dividend, it is subtracted from the total dividend and then divided by the outstanding shares.

What does Dividend Per Share indicate?

  • As seen before, dividend per share is the total dividend a company pays out divided by the number of outstanding shares.
  • DPS can show how profitable a company is and can help investors know about the company’s financial health and stability.
  • When the DPS is steady or increases, it can indicate that the company is in stable or good health.
  • When the DPS decreases, it can indicate that the company isn’t in a good financial state. A decline in the DPS can also mean that the company has reinvested the year’s profit into the growth of the company which can result in higher dividends in the long term.

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Conclusion:

Dividend per share is an important metric as it allows investors to determine the amount of cash they will earn according to the number of shares they hold. A company paying high dividends can ensure the shareholders that it’s in a good position. On the flip side, never reinvesting the profits can also indicate that the company is not thinking long term.

 

Author – Abha Shetty

About the author – Abha is a second-year BMS student and FRM level 1 candidate. She is very intrigued by the world of financial markets and hopes to master the art of investing and trading.

 

Related:

Dividend Payment Process

Employee Stock Ownership Plan (ESOP)

 

 

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