Dividend Per Share: Importance, How to Calculate Dividend Per Share, Calculation Formula

Last Updated: 16 Oct 2024

For a dividend-seeking investor, who usually gets consistent returns from their share investment, dividends are regarded as one of the very crucial elements of an investment plan. An investor should first grasp how to figure the dividend paid per share, which is the amount a firm pays to each of their held shares before investing in dividend-paying companies. This statistic provides vital information about the financial situation of a business and helps investors determine the actual dividend value of their stock purchases.

This article will walk over how dividend per share is computed, explain the dividend per share formula, and discuss the significance of dividend yield. Knowing these ideas will help you to decide which dividend-paying stocks you should include in your portfolio.

What is Dividend Per Share?

Dividend per share, or DPS, is the total amount an organization distributes in dividends for each one of its owned shares. Since DPS tells about how much a company is returning to shareholders from profits, it is a significant revenue-oriented statistic. Since regular income sources are vital, investors mostly search for companies with more constant and larger dividends per share.

Simply put, DPS stands for the amount of money one receives in return for every share owned in a company. In this regard, it is a good indicator of just how profitable and financially stable a company is, especially to an investor who may be looking to invest in stocks for the potential for dividend income.

Importance of Dividend Per Share

The dividend per share is among the important measures that help one understand how much of a firm’s earnings are returned to its shareholders. It helps long-term investors identify firms that continually return value to their shareholders, thereby offering stable income even during a market downturn. Determining the dividend per share may also help facilitate the comparison of various firms to determine which would offer a higher return, dividends-wise.

Additionally, a firm that pays out its dividend or increases the payout is perceived to be financially healthy. This may translate to positive reinforcement on the part of investors that the firm is so well managed and pretty confident of future profit levels.
How to Calculate Dividend Per Share
Dividend Per Share (DPS) = Total Dividends Paid/ Number of Outstanding Shares

Let us examine this using an example. Say a company has 10 crore (100 million) outstanding shares and announces total dividend payouts of ₹20 crore (₹200 million) in a year. The dividend per share formula lets us find the DPS as follows:

DPS = ₹20,00,00,000/ 10,00,00,000 = ₹2
This means that for every share an investor owns, they will receive ₹2 as a dividend during that year.

Dividend Yield and the Relationship to the DPS

The dividend yield is a much more important metric even if the dividend per share indicates the amount each share pays the owner. The dividend yield is the percentage return on investment an investor gains from a corporation based on the present stock price. One can find which investment will provide more dividends by contrasting equities using dividend yield.

Here’s the calculation for dividend yield:

Dividend Yield = Dividend Per Share/ Price Per Share* 100

For example, if a company pays ₹2 in dividends per share (DPS) and its stock is trading at ₹100, the dividend yield would be:

Dividend Yield = ₹2/ ₹100* 100 = 2%

This indicates that, depending on the stock’s current price, the investor is receiving dividends that yield a 2% return. For investors seeking a stable return in relation to the market price of the company in addition to a large dividend per share, dividend yield becomes an important consideration.

Factors That Affect Dividend Per Share

Several factors can affect a company’s dividend per share:

1. Earnings:

The ability of a business to pay a dividend is decided by various yardsticks. Profitability is one important yardstick which determines whether the company can really afford to pay a dividend or not. A better possibility of paying a higher dividend ordinarily goes hand in hand with higher profits.

2. Dividend Policy:

There are various sorts of companies that institute a certain percentage of earnings as payables through dividends. Some adopt a constant dividend percentage irrespective of yearly performance.

3. Payout Ratio:

Payout ratio is the percentage of earnings paid out as dividends. The more payouts, the more earnings the company is returning to shareholders. Lesser payout ratio would imply lesser earnings are being returned by the company for reinvestment.

4. Market Conditions:

Although an enterprise may be profitable, recession or crisis might cause it to reduce the payout of its dividends because cash is crucial at such times, and this reduces the dividend per share.

Dividend Per Share Formula

To further understand how the dividend per share formula operates in a real-world context, let us consider an actual case. Suppose a company announces a ₹50 crore (500 million) total dividend payout and 25 crore (250 million) total outstanding shares.

Using the dividend per share formula:

DPS = ₹50,00,00,000/ 25,00,00,000 = ₹2

So, each shareholder receives ₹2 per share as a dividend. If an investor owns 1,000 shares of the company, they will receive ₹2,000 in dividends for that period.

This calculation helps investors determine how much income they can expect based on the number of shares they own.

Why Dividend Per Share and Dividend Yield Matter?

However, in the study of income-generating stocks, in fact, dividend per share and dividend yield hold equal importance. Though DPS tells an investor exactly how much he will get per share, the dividend yield lets him evaluate his return in respect to the price of a stock.

For instance, two companies pay the same dividend per share but when priced much lower than the other, the dividend yield will be higher once it sells at a lesser price. It is, therefore, more attractive for an income-minded investor seeking better returns on capital.

Growth in Dividend Per Share

First off would be the growth of dividend per share over time. Dividend-paying stocks that have always increased their dividend tend to reflect solid health and consistent earnings growth. This would translate into good income and capital appreciation for investors.

Because they offer the twin advantages of rising income and stock price appreciation, such stocks typically draw long-term investors. Because they provide the dual advantages of rising income and stock price growth, stocks with a history of increasing dividend payments will typically draw long-term investors.

Using Dividend Per Share for Portfolio Building

For investors creating a dividend-oriented portfolio, computation of dividend per share has grown crucial. This is aimed at equities with reasonably good dividend rates together with growth prospects so that the investor may build a portfolio with consistent income and capital gains possibilities.

In income investing, diversifying the portfolio in terms of high dividend-yielding stocks and substantial increase in dividend per share helps balance risk and return. Such a mix can offer both long-term appreciation and returns right now.

Conclusion

Therefore, for any investor to develop a dividend-based investment plan, knowing how to determine the dividend per share is quite vital. Any investor can decide which stocks are likely to generate the best returns in terms of income as well as growth using the formula of dividend per share and related measurements, such as the dividend yield. Building a strong, income-generating portfolio depends much on things like the increase in dividends and the sustainability of payouts, so attention to these aspects becomes quite helpful.

Frequently Asked Questions

1. What is dividend per share (DPS)?

The dividend per share, or DPS, is the sum of money a company pays each individual share owner. It is calculated by dividing the total number of shares in circulation by the total dividends distributed.

2. How do you calculate the dividend per share?

The formula for calculating dividend per share is:

DPS = Total Dividends Paid/ Number of Outstanding Shares

This gives the amount of dividend paid per share owned by the investor.

3. Describe the variations between dividend yield and dividend per share.

Whereas the dividend per share shows how much each investor is paid per share, the dividend yield is the income received by an investment in respect to the price of the stock.

4. The dividend per share is paid how frequently?

Usually distributed quarterly or annually, the frequency depends on the dividend policy of the corporation.

5. Why do investors really need dividend yield?

As a measure of the return an investor is receiving from dividends relative to the stock’s current price, dividend yield assumes significance and facilitates more accurate comparisons between other dividend-paying equities.