Dividend Per Share: Definition
Dividend per share (DPS) is the total dividend declared for every common share outstanding. Just like, we find earning per share (EPS) because per share data provides a better idea of the company’s profitability. Similarly, dividend per share (DPS) provides an idea of how much dividend an investor will get on a per-share basis.
Dividend Per Share (DPS) Formula
There are two formulas to calculate DPS. Depending on the purpose of using DPS, you can use the formula that best fits your need.
- Dividend Per Share: Definition
- Dividend Per Share (DPS) Formula
- Dividend Per Share Calculation with Example
- Analysis/Interpretation of Dividend Per Share
- Advantages of Using Dividend Per Share Ratio
|Dividend Per Share = Dividends / Number of Common Shares Outstanding|
You can calculate the dividend per share by dividing the dividends by the number of common shares outstanding for a given fiscal year. If your purpose is to know the amount of dividend, then this formula should be used. Ex. You are holding 100 shares of a company. The Company announced a dividend of $5/share so that you will receive $ 500.
- Dividends: It only includes interim dividends to be distributed to common shareholders for a specific fiscal year. Preference dividends and special dividends are not be included here.
- Number of Common Shares Outstanding: It includes the number of common shares outstanding as on a particular date. The Company makes the list of shareholders entitled to receive dividends on the record date. The number of outstanding shares as on that date is the denominator.
|Dividend Per Share = Dividends / Weighted Average Number of Common Shares Outstanding = Earnings Per Share * Dividend Payout Ratio|
- Weighted average number of common shares outstanding: Changes in the number of shares outstanding during the year are ignored in the first formula. In the second formula, a number of common shares outstanding are taken, and weights are given to them based on the time they have remained outstanding during the fiscal year. Then, the weighted average is found out to consider the changes in shares outstanding during the year.
To simplify, let’s take a hypothetical example for weighted average shares:
|Date||Description||Increase||Decrease||Shares outstanding (A)||Time Weights (B)||(A)*(B)|
|1/1/2016||Beginning No. of shares outstanding||1,000,000||3/12 months||250,000|
|1/4/2016||Convertible debt converted into shares||200,000||1,200,000||7/12 months||700,000|
|1/11/2016||Shares Repurchased||600,000||600,000||2/12 months||100,000|
|Weighted average no. of common shares outstanding||1,050,000|
Here, shares outstanding are given weight on the basis of the time they were outstanding during the period. If the purpose is to analyze the company, then the second formula makes more sense.
Dividend Per Share Calculation with Example
|Description||Company X||Company Y|
|Profit attributable to common shareholders (A)||$ 2,000,000||$ 500,000|
|Dividends declared (B)||$ 1,000,000||$ 300,000|
|No of shares outstanding (C)||500,000||100,000|
|Earnings per share (D) = (A/C)||$ 4 / Share||$ 5/ Share|
|Dividend per share (E) = (B/C)||$ 2/ Share||$ 3/ Share|
You can also use the Dividend Per Share Calculator
Analysis/Interpretation of Dividend Per Share
DPS of $3 per share suggests that the investor will receive $3 for every share held. In the example above, Company Y is considered better as it has $ 3 per share DPS compared to $2 per share of company X. It should be noted that this kind of comparison should be done between similar companies. Companies of different nature require more detailed analysis and research.
Advantages of Using Dividend Per Share Ratio
DPS provides better comparability between the two companies as it is on a per-share basis. You should not compare the absolute amount of dividends as it might lead to an unreliable conclusion due to differences in the nature of companies.
DPS Trends as Signals for Markets
Increasing the level of DPS is considered to be a positive signal as it shows that the company has more confidence in its future earnings. Similarly, reducing that level would send a negative signal. In this scenario, you should always go through a dividend policy before concluding anything.
Simplicity and predictability of DPS
DPS is a very simple ratio to understand. Also, if a company tries to maintain a stable level of DPS, then it will result in less fluctuations in DPS statistics. Due to this, predicting the future dividend income through DPS becomes easy.
Used in the Valuation model
Many valuation models consider DPS (e.g., dividend discount model) due to its predictability. It is one of the most useful ratios in valuing and analyzing the company’s stock.
Using DPS as a metric provides more comparability and reliable interpretation rather than the absolute dividend. Please note that you should cross-check the method with which it calculates DPS. Using any DPS statistics blindly might lead to faulty analysis. DPS is considered a positive sign for the company’s financial strength. However, DPS is affected by many factors like the company’s dividend policy, reinvestment opportunities available, size, industry, life cycle stage, etc. Hence, it should be used with caution and other metrics to conclude about the company’s financial strength.