Learn what DPS is, how to calculate it, what DPS can tell you about a company, and how DPS differs from earnings per share (EPS).
What Are Dividends Per Share?
To understand DPS, it is necessary to understand dividends. Dividends are cash payments to shareholders that are paid from a company’s profits. Determining a company’s DPS is the most accurate way to determine how much income one can expect to receive from an investment on a per-share basis.
How Dividends Per Share Work
The majority of companies that pay a dividend do so quarterly. To calculate a company’s DPS, you divide the total amount of dividends paid by the total number of outstanding ordinary shares issued. The formula looks like this: DPS = Total Dividends Paid - Any Special Dividends/ Shares Outstanding For example, if a company pays a total dividend of $500,000 and there are 1 million shares outstanding, the DPS would be 500,000 / 1,000,000 = 0.50, or 50 cents per share. While investors can calculate a company’s DPS themselves, the annual 10-K report issued by most companies via the U.S. Securities and Exchange Commission typically provides that information, along with notes regarding share buybacks and other events that can affect DPS.
Types of Dividends
Dividends are usually cash payments made periodically to stock investors, but there are other types.
Property dividends: In this case, a company gives investors physical assets such as real estate, inventory, or equipment, instead of cash. The dividend is recorded at the market value of the asset.Stock dividends: The company gives investors additional shares of stock based on the current number of shares the investor holds.Scrip dividends: The company issues a promissory note to pay cash or new-share dividends at a later date.Liquidating dividends: Typically issued when a company is shutting down, the company liquidates its assets, settles financial obligations, then pays the remaining proceeds to investors as final dividends.
Estimating Future DPS
If a company has a track record of paying a consistent percentage of its earnings as dividends, it’s possible to estimate what the DPS will be through the company’s income statement. Here are the steps: Dividends and DPS are means of measuring a company’s strength. A record of paying consistent dividends or increasing dividends is often interpreted as a sign of positive expectations for future growth. This can attract additional investors and result in an increase in a company’s stock price. It is important to note that a company that has consistently paid a percentage of its earnings in dividends may decrease or interrupt dividend payments if business slumps.
Alternatives to Dividends Per Share
Another metric investors use to assess the strength of a company and its future prospects is earnings per share (EPS). EPS measures each common share’s profit allocation in relation to the company’s total profit. Investors also refer to a company’s dividend payout ratio (DPR), which is the proportion of dividends paid to shareholders in relation to the total amount of net income the company generates. For example, if a company’s net income is $20,000 and it pays $5,000 in dividends, its DPR is 25%. A company’s DPR is not necessarily a signal of whether a company is a good or bad investment. Rather, DPR can signify to investors whether a company is likely to provide returns in the form of income (via regular and substantial dividends) or through growth that will hopefully result in a higher share price.
Dividends Per Share vs. Earnings Per Share
While both DPS and EPS are reflections of a company’s profitability, only DPS gives an investor a sense of how much income an investment will provide via dividend payments. Here is a look at what each provides. A low DPS does not automatically flag concerns about an investment. It may simply mean that the company is instead reinvesting its profits into research and development or other areas that will spur growth, rather than returning money to investors through dividends. Theoretically, this choice will drive more profits, which will result in increased share price.
