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What is Dividend per share?

9 Mins 27 Jul 2023 0 COMMENT

Equity shares represent a unit of ownership in a company and the shareholders, being owners, are entitled to a stake in the profits earned by the company. A part of the profit is distributed to the shareholders in the form of dividends. Hence, with the benefit of appreciation in the value over a period of time, investing in stocks also helps investors earn returns by way of dividends.

The amount of money a company pays to its shareholders for each share of its stock is called the Dividend per share (DPS). It is a critical measure of a company’s financial health and performance. Let us understand what is dividend per share.

Dividend Per Share Meaning

Dividend per share, also known as DPS, refers to the dividend that a company has declared and paid to each of its outstanding shares during a period of time. To calculate DPS, you have to take into consideration various kinds of dividends that are paid out.

What is the Formula for Calculating Dividend per Share?

Dividend per Share formula is given below:

DPS = Total dividends paid out in a year / outstanding shares of a company

The result of this formula is represented as a ratio. It can help tell how much of the dividend was earned by the stocks of a particular company over a particular time period. If the DPS result is high, it paints a good picture of the company and showcases that the company has long-term sustained earnings. It also highlights the company’s ability to share its profits with shareholders.

To understand DPS better, we can take a look at the example given below:

Suppose a company named ‘X’ declared that its interim dividend was Rs 9 and its final dividend was Rs 10 for the financial year 2021-2022.

Thus, the total dividends will be the addition of the two figures given above, resulting in Rs 19 per share.

To calculate DPS, we could even plug in the data in the formula mentioned above.

DPS = 19 x outstanding shares / outstanding shares.

Here, the outstanding shares cancel each other out, leaving us with 19 as the answer.

What are Dividends?

The dividend is the amount that any publically listed company pays to shareholders for each share that they own. Companies usually give out dividends from the profits that they earn. The rate at which the dividend will be paid to the shareholders is decided by the company’s board of directors.

A point to note is that whether or not a company wants to pay dividends from their profits remains up to its discretion. A company might decide to not pay dividends and instead reinvest their profits for growth or expansion purposes.

A company pays out dividends to its shareholder in different forms. They are as follows:

Cash Dividend:

Cash dividends are what the company pays out as cash per share. A company will issue the amount for shares held by shareholders, and it is deposited in the bank accounts.

Stock Dividend:

A Stock dividend is when a company issues additional shares to shareholders. A classic example of this would be bonus shares. These are usually issued in ratios. Thus, if the ratio of issuance is 1:3, then for every unit you hold, you will receive get additional three shares.

Let us know the different types of cash dividends:

Special Dividends:

These are one-time dividends that a company pays to its shareholders in the form of cash. These dividends are handed out once. They are paid when a company has earned certain windfall gains associated with particular events.

Interim Dividend:

Interim dividends are declared and paid during a financial year before a company’s annual general meeting (AGM) and prior to the preparation of final accounts for the ongoing financial year. These dividends are usually declared with the company’s interim financial statements.

Final Dividend:

This type of dividend is declared for a preceding financial year after the financial statements and accounts for the fiscal year have been prepared.

DPS is an important metric that helps gauge a company’s financial position. It also helps determine whether a company has enough surplus profit to reward its shareholders. However, do keep in mind that sometimes it is important for a company to reinvest its profits to further its operations. Thus, a company not paying dividends is not always a sign of not rewarding shareholders or not earning enough profits.

However, it is also to be noted that simply because a company is offering high dividends does not mean that it is a good reason to invest in a company. Take the time to do your own research and understand where the company is utilizing its profits earned.

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