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Dividend Per Share

Dividend per share (DPS) is a financial metric that quantifies the dividends distributed to shareholders on a per-share basis. Essentially, it tells you how much dividend income you will receive for each share of stock you own. For those seeking income through investments, DPS is an essential metric to consider.

Formula

DPS=Total Dividends PaidTotal Shares Outstanding\text{DPS} = \frac{\text{Total Dividends Paid}}{\text{Total Shares Outstanding}}

To illustrate, let’s say Company ABC paid a total of $10 million in dividends this year and has 2 million shares outstanding.

Here’s the math:

DPS=$10,000,0002,000,000 shares=$5 per share\text{DPS} = \frac{\$10,000,000}{2,000,000 \text{ shares}} = \$5 \text{ per share}

This means that for every share of Company ABC that you own, you’ll receive $5 in dividends this year.

Why DPS Matters to Investors

For investors, DPS offers valuable insights:

  1. Income Stream: If you are investing with the goal of creating a steady income stream, DPS helps you understand how much money you can expect to receive regularly. Higher DPS usually translates to more income.
  2. Company Performance: A consistently high or increasing DPS might indicate a company’s robust financial health, reliability, and profitability. It suggests that the company generates enough cash flow to not only sustain its operations but also pay back to its shareholders.
  3. Comparison Tool: DPS allows you to compare dividend payouts across different companies regardless of their stock prices or market capitalization.

Evaluating DPS in Context

While DPS is a significant metric, it should not be analyzed in isolation. Here are a couple of context points to consider:

  1. Dividend Yield: This is a related metric which is calculated as DPSStock Price.\frac{\text{DPS}}{\text{Stock Price}}. It offers perspective on how the dividend payout measures up relative to the share price. A high DPS with a low yield might mean the stock is pricey, while a low DPS with a high yield might suggest the stock is undervalued.
  2. Payout Ratio: This ratio helps evaluate whether a company’s DPS is sustainable. It is the proportion of earnings paid out as dividends and is computed as Total DividendsNet Income.\frac{\text{Total Dividends}}{\text{Net Income}}.

For example, if Company XYZ reports net income of $50 million and pays out $10 million in dividends, its payout ratio is 20%. A lower payout ratio suggests that the company is retaining more earnings for growth and other activities, while a high payout ratio might indicate less reinvestment into the business.

Practical Example

Say you’re considering investing in two companies, Company A and Company B. Company A pays a total of $30 million in dividends annually and has 5 million shares outstanding. Company B, on the other hand, pays $15 million in dividends but only has 1.5 million shares.

For Company A:

DPS=$30,000,0005,000,000=$6 per share\text{DPS} = \frac{\$30,000,000}{5,000,000} = \$6 \text{ per share}

For Company B:

DPS=$15,000,0001,500,000=$10 per share\text{DPS} = \frac{\$15,000,000}{1,500,000} = \$10 \text{ per share}

Here, Company B offers a higher DPS, which might make it more attractive for an income-focused investor.

Conclusion

Understanding Dividend per Share (DPS) equips investors with crucial insights into how much income they can expect from their investments. Whether you are building a dividend portfolio or conducting comprehensive stock analysis, integrating DPS into your evaluation process can guide you to more informed and potentially rewarding investment decisions.