What Does Dividend Per Share Tell Investors?

What Is Dividend Per Share?

Dividend per share (DPS) refers to the total dividend a company pays out over a 12-month period, divided by the total number of outstanding shares. In other words, it is how much of a dividend investors can expect per share they own in the company over a year.

A company uses this calculation to share profits with its shareholders. DPS can indicate how profitable a company is over a fiscal period. It can also provide information to investors about the company’s past financial health, as well as its future financial stability.

What Dividends Per Share Tells You

DPS is an important financial ratio for investors because the amount a firm pays out in dividends directly translates to income for shareholders. Dividend per share is one of the most straightforward figures an investor can use to calculate his or her dividend payments from owning shares of a stock over time.

Dividend per share can also tell investors more about a company than simply how much money they can expect to receive. Changes in DPS can provide insight into a company’s financial health.

A growing DPS can indicate that a company’s management believes that its earnings growth can be sustained. 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.

A decreasing DPS, on the other hand, may indicate that a company is experiencing poor earnings and may experience financial struggles in the future. Suppose company ABC had a DPS of 60 cents last year, but this year, it doesn’t pay a 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 may 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, including interim dividends, over a period of time by the number of outstanding ordinary shares issued. A company’s DPS is often derived using the dividend paid in the most recent quarter, which is also used to calculate the dividend yield.

DPS can be calculated by using the following formula, where the variables are defined as:

$\begin{aligned} &\text{DPS} = \frac { \text{D} – \text{SD} }{ \text{S} } \\ &\textbf{where:} \\ &\text{D} = \text{sum of dividends over a period (usually} \\ &\text{a quarter or year)} \\ &\text{SD} = \text{special, one-time dividends in the period} \\ &\text{S} = \text{ordinary shares outstanding for the period} \\ \end{aligned}$​DPS=SD−SD​where:D=sum of dividends over a period (usuallya quarter or year)SD=special, one-time dividends in the periodS=ordinary shares outstanding for the period​

The Bottom Line

Dividend per share (DPS) is a financial ratio that investors can use to evaluate the financial health and growth prospects of a company. It is equal to the total dividend a company pays out over 12 months divided by the total number of outstanding shares.

A DPS that remains steady or grows over time can signal stability and growth within a company. A DPS that is declining over time may indicate poor earnings or other financial hardship. However, declining DPS can also indicate that a company has chosen to reinvest in operations or pay down debt, which can boost business in the long term.

Because DPS is not always a clear-cut signal, it shouldn’t be used in isolation. Investors should use multiple financial ratios and metrics to evaluate a business’s financial health and prospects for growth.