What Is Dividend Per Share (DPS)?
Dividend per share (DPS) 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, usually a year,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.
Key Takeaways
- Dividend per share (DPS) is the sum of declared dividends issued by a company for every ordinary share outstanding.
- DPS is calculated by dividing the total dividends paid out by a business, including interim dividends, over a period of time, usually a year, by the number of outstanding ordinary shares issued.
- DPS is an important metric to investors because the amount a firm pays out in dividends directly translates to income for the shareholder.
- A growing DPS over time can also be a sign that a company's management believes that its earnings growth can be sustained.
Understanding Dividend Per Share (DPS)
DPS is an important metric to investors because the amount a firm pays out in dividends directly translates to income for the shareholder. It is the most straightforward figure an investor can use to calculate their dividend payments from owning shares of a stock over time.
A consistent increase in DPS over time can also give investors confidence that the company's management believes that its earnings growth can be sustained.
DPS Formula
DPS=SD−SDwhere:D=sumofdividendsoveraperiod(usuallyaquarteroryear)SD=special,one-timedividendsintheperiodS=ordinarysharesoutstandingfortheperiod
Dividends over the entire year, not including any special dividends, must be added together for a proper calculation of DPS, including interim dividends. Special dividends are dividends that are only expected to be issued once and are, therefore, not included. Interim dividends are dividends distributed to shareholders that have been declared and paid before a company has determined its annual earnings.
If a company has issued common shares during the calculation period, the total number of ordinary shares outstanding is generally calculated using the weighted averageof shares over the reporting period, which is the same figure used for earnings per share (EPS).
For example, assume ABC company paid a total of $237,000 in dividends over the last year, during which there was a special one-time dividend totaling $59,250. ABC has 2 million shares outstanding, so its DPS is ($237,000-$59,250)/2,000,000 = $0.09 per share.
Special Considerations
DPS is related to several financial metrics that take into account a firm's dividend payments, such as the payout ratio and retention ratio. Given the definition of payout ratio as the proportion of earnings paid out as dividends to shareholders, DPS can be calculated by multiplying a firm's payout ratio by itsearnings per share. A company's EPS, equal to net income divided by the number of outstanding shares, is often easily accessible via the firm'sincome statement. The retention ratio, meanwhile, refers to the opposite of the payout ratio, as it instead measures the proportion of a firm's earnings retained and therefore not paid out as dividends.
The idea that the intrinsic value of a stock can be estimated by its future dividends or the value of the cash flows the stock will generate in the future makes up the basis of the dividend discount model. The model typically takes into account the most recent DPS for its calculation.
Dividend Per Share Examples
Increasing DPS is a good way for a company to signal strong performance to its shareholders. For this reason, many companies that pay a dividend focus on adding to their DPS, so established dividend-paying corporations tend to boast steady DPS growth.Coca-Cola, for example, has paid a quarterly dividend since 1920 and has consistently increased annual DPS since at least 1996 (adjusting for stock splits).
Similarly, Walmart has upped its annual cash dividend each year since it first declared a $0.05 dividend payout in March 1974. Since 2015, the retail giant has added at least 4 cents each year to its dividend per share,which was raised to $2.08 for Walmart's FY 2019.
Why Is Dividend Per Share (DPS) Important to Investors?
DPS is an important metric to investors because the amount a firm pays out in dividends directly translates to income for the shareholder. It is the most straightforward figure an investor can use to calculate their dividend payments from owning shares of a stock over time. A consistent increase in DPS over time can also give investors confidence that the company's management believes that its earnings growth can be sustained.
How Is DPS Calculated?
Dividends over the entire year, not including any special dividends, must be added together for a proper calculation of DPS, including interim dividends. Special dividends are dividends that are only expected to be issued once and are, therefore, not included. Interim dividends are dividends distributed to shareholders that have been declared and paid before a company has determined its annual earnings. If a company has issued common shares during the calculation period, the total number of ordinary shares outstanding is generally calculated using the weighted average of shares over the reporting period, which is the same figure used for earnings per share (EPS)
What Is the Retention Ratio?
The retention ratio, also called the plowback ratio, is the proportion of earnings kept back in the business as retained earnings. It refers to the percentage of net income that is retained to grow the business, rather than being paid out as dividends. It is the opposite of the payout ratio, which measures the percentage of profit paid out to shareholders as dividends. This metric helps investors determine how much money a company is keeping to reinvest in the company's operations. Typically, newer companies have high retention ratios as they are investing earnings back into the company to accelerate growth.
