Dividend per share or DPS is all the dividends that a company has paid out for each of its outstanding shares during a certain period of time. DPS is calculated by taking into account all kinds of dividends that are paid out
Dividend Per Share Formula:
DPS = Total dividends paid out in a year/outstanding shares of the company
This ratio can tell how much dividend was earned by owning the stocks of that particular company over a period of time. A rising DPS speaks highly of the company because it shows that the company has long term sustained earnings and has confidence in sharing its profits with shareholders.
An Illustrated Example
Let’s understand what DPS is and how it is calculated with the help of an example. We will take Infosys Ltd. as an example and calculate the DPS for two financial years.
Financial Year 2020-2021
Infosys declared an interim dividend of Rs 8 and a final dividend of Rs 9.5 for the financial year 2020-2021. Here the calculation is pretty simple.
Total dividends are Rs 17.5 per share.
Even if you put it in the formula, the total number of outstanding shares cancel out.
Total Annual dividend: (17.5 x outstanding shares)/outstanding shares
The calculation with the help of dividend per share formula is simple.
Financial Year 2019-2020
Infosys declared the following dividends
Final dividend: Rs 10.5 per share for fiscal 2019
Interim dividend: Rs 7 per share paid in October in 2018
Special dividend: Rs 4 per share in January 2019
Total dividend per share: Rs 21.5 per share
All the numbers have been taken from the company’s annual reports.
What is Meant by Dividends?
A dividend is an amount that a publicly listed company gives out to its shareholders for every share they hold. A company mostly gives dividends out of its profits. The rate of dividend to be paid is decided by the company’s board of directors.
However, the important thing to remember about dividends is that it is discretionary. A company may decide to declare dividends out of its profits or reinvest its profits back into the business or a company may want to do both. It is completely the company board’s decision.
Types of Cash Dividend
We now know what is dividend per share but this dividend can be given in three different forms. When a company gives out a cash dividend per share, the amount will be transferred directly into the bank account depending. Here are the different types of dividends
Special dividends: Special dividends are one time dividends that a company pays to its shareholders in the form of cash. Since it’s a one-time affair, special dividends are also tied to particular events which may have led to windfall gains for the company.
Final Dividend: Final dividend is declared for a preceding financial year and after the accounts and financials have been prepared for the fiscal year under consideration.
Interim Dividend: Interim dividend is declared before the accounts are prepared for the ongoing financial year. Hindustan Unilever Ltd. (HUL Share) declared an interim dividend of Rs 9.5 per share for the financial year, ending on March 31, 2021.
Forms of Dividends
A company may pay dividends in various forms but these are the most prominent ones.
Cash Dividend: In cash dividend, the company pays out cash per share. The company issues an amount per share held by all the shareholders which are deposited in the bank account.
Stock dividend: Stock dividend is when a company issues extra shares to the shareholders. An example of a stock dividend is a bonus issue. Say a company announces a bonus issue in the ratio: 5:1. This means the shareholder will get five shares for every one share held. So if an investor holds five shares, he or she will get 25 shares.
A high DPS tells that a company is in a good position, is churning good profits and has enough surplus cash so it can reward its shareholders. In another way, it also tells us that the company values its shareholders. More often than not a company gives out dividends to shareholders from its net profit. However, there is a catch.
Dividends being distributed means money not being re-invested in the company. Sometimes it can serve as a not-so-good sign.
At times businesses avoid reinvesting the money back into the business if they don’t see much upside and this is not a good sign. The moral that can be derived from this is that high dividends should not be considered as a standalone factor to invest in a company. Do not invest in a stock just because it is the highest dividend-paying stock. Look at other factors like financials, sales and business outreach, management quality, consistency in returns over a long period of time. Also, a high dividend paying stock may not always be a good company. In short, dividends are good but do not forget to conduct fundamental research before placing bets on any stock.