Dividend Per Share (DPS) Ratio: Complete Guide

What's DPS? | How do you calculate it step-by-step? | What's "good"? | Real-life examples?

Emilie N.- FCCA, CB, MBS
Emilie N.- FCCA, CB, MBS

Emilie is a Certified Accountant and Banker with Master's in Business and 15 years of experience in finance and accounting from corporates, financial services firms - and fast growing start-ups.

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Contents

Definition: What Is Dividend Per Share (DPS)?

Explanation: Who Uses DPS & Why?

You’d use DPS to evaluate stocks to invest in, especially if you prefer companies that pay dividends.

Or if you already are a shareholder of a company and want to figure out how much of the overall dividend payout of a company you’re entitled to based on how many shares you own.

For the company itself, declaring dividends and increasing DPS over time is a way to signal strong financial performance to the world.

In summary, these are the top 3 reasons why DPS is so frequently used by investors, shareholders and companies:

Benefits & Uses of DPS
User Indicator Benefit
Shareholder Shareholder value Shareholders calculate DPS to arrive at the amount of per-share dividend income earned from a particular company for each share owned over a period of time.
Investor Financial health Investors calculate DPS to get an indication of a company’s profitability, financial stability and growth.
Quoted company Performance signal Publicly listed companies calculate DPS to share a portion of their profits with shareholders through a dividend issue as a signal of strength.

But don’t be fooled, declining DPS–or no dividend at all–is not automatically a red flag signalling financial issues.

It could just simply be a sign of the company reinvesting funds into the business or avoiding confusing signalling to the market, which are both good things.


So, because DPS is such an important and widely used investor ratio, this article covers everything you need to know, including:

Formula: How Do You Calculate DPS?

Dividend Per Share (DPS) =

Total Amount of Ordinary Dividends Declared

÷

Total Number of Ordinary Shares Outstanding

Where the formula variables are defined as:

>> Dividends:

  • Exclude any special one-time dividends that are not part of a company’s standard dividend policy and payment cycle.
  • Include all types of ordinary dividends declared throughout the period, including both interim (distributed throughout the year before total annual earnings are determined) and final (issued at the end of the year) dividend payments.
  • The value of property dividends, stock dividends and other forms of dividend payment other than cash can be included as long as they are part of a company’s standard dividend policy.
  • Dividends may be gross or net of tax, depending on whether a company is required to withhold tax on shareholder dividend income at source.

>> Shares:

  • Include only outstanding shares by excluding treasury stock that companies keep for themselves
  • Include only primary ordinary common shares
    • If a company has issued different classes of shares, such as preferential shares, the DPS may be calculated separately for each class of stock.
    • If a company has more than one type of common stock, the DPS may be calculated for the primary share type, which is typically the one most actively traded in the market with the largest number of outstanding shares.
  • Use either the number of shares outstanding at a certain date or an average over a specified period of time. Weighted average of shares is generally used in cases where the company issued common shares during the calculation period and/or the number of outstanding shares on the stock market fluctuated significantly during the calculation period.
    • You can simply average the number of shares outstanding at the beginning and the end of a period or calculate a more complex weighted average.

>> Time Period:

  • Dividends and shares must be based on a the same time period, such as a fiscal year, financial year, quarter etc.

Alternative Formula for DPS

For companies that have a consistent dividend payout ratio, which means that they pay a consistent percentage of net profit as dividends, the DPS can be estimated based on their financial statements.

Which is equal to:

Dividend Per Share (DPS) =

(Net Income ÷ Total Number of Shares Outstanding)

x

Dividend Payout Ratio

In this scenario, DPS can be calculated by multiplying a company’s payout ratio by its earnings per share, where:

  • Payout Ratio is the proportion of earnings paid out as dividends to shareholders
  • Earnings per Share is equal to net income divided by the number of outstanding shares

The DPS itself is often used to calculate other dividend related metrics, such as the dividend yield, dividend cover, dividend payout ratio or the dividend discount model.

Step-by-Step Calculation of DPS

In order to calculate the dividend payment that a shareholder receives for each share held–Dividends Per Share (DPS)–follow these simple 3 steps:

Formula #1: DPS = Dividends ÷ Shares

How to Calculate Dividends Per Share (DPS) in 3 Steps:
Formula #1: DPS = Dividends ÷ Shares
Step Result Calculation
Step 1: Total dividends Sum up the total ordinary dividends issued by a company over a period of time
Step 2: Total shares Sum up the total outstanding ordinary shares issued by a company over a period of time
Step 3: DPS Divide the total dividend (1.) by the total shares (2.)

Formula #2: DPS = EPS x Dividend Payout Ratio

How to Calculate Dividends Per Share (DPS) in 3 Steps:
Formula #2: DPS = EPS x Dividend Payout Ratio
Step Result Calculation
Step 1: Payout ratio Determine a company’s typical dividend payout ratio based on historical dividend payouts
Step 2: EPS Divide the net income (income statement) of a company by its number of outstanding shares (balance sheet)
Step 3: DPS Multiply the dividend payout ratio (1.) by the net income per share (2.)

Examples of DPS Calculation

DPS Calculation: 2 Step-by-Step Examples

Example #1

This year, Company X has reported a net income of $2 million. For the same period, the company had 50,000 shares in issue, of which 10,000 is treasury stock.

Historically, Company X paid out 50% of earnings as dividends to its shareholders, none of which were special dividends. The company is not required to tax the dividend payments at source.

What dividend per share can the shareholders of Company X expect for that period?

DPS Calculation - Step-by-Step - Example #1
Company X: Financial Results Amount / Calculation
Total Net Earnings for the Fiscal Period $2,000,000
Net Earnings Attributable to Common Shareholders $1,000,000
Number of Shares Issued 50,000
>>> of which Treasury Shares 10,000
5-year Average Payout Ratio 50%
DPS = Dividends ÷ Shares = $1,000,000 ÷ (50,000 – 10,000) = $25
Alternative: DPS = EPS x Dividend Payout Ratio = [$2,000,000 ÷ (50,000 – 10,000)] x 50% = $25

The dividend per share that the shareholders of Company X can expect to receive is $25.

Example #2

Over the last year, Company Y attributed $1,200,000 of its net earnings to shareholders as a dividend, including an interim dividend of $200,000 and a special one-time dividend totalling $100,000.

While the company had 50,000 common shares outstanding at the beginning of the period, the ending outstanding stock increased to 60,000, because new common shares were issued during the year.

What is the DPS of Company XYZ for that year?

DPS Calculation - Step-by-Step - Example #2
Company Y: Financial Results Amount / Calculation
Total Net Earnings for the Fiscal Period $1,200,000
>>> Interim Dividend $200,000
>>> Special Dividend $100,000
>>> Final Dividend $900,000 = ($1,200,000 - $200,000 - $100,000)
Outstanding Shares – Opening Balance 50,000
Outstanding Shares – Closing Balance 60,000
Dividends for DPS = (Total Dividend – Special Dividend) $1,100,000 = ($1,200,000 - $100,000)
Shares for DPS = (Average of Opening and Closing Balance) 55,000 = [(50,000 + 60,000) ÷ 2]
DPS = Dividends ÷ Shares $20 = ($1,100,000 ÷ 55,000)

The dividend per share of Company XYZ is $20.

Real-World Examples of DPS

Paying out dividends to shareholders every year and continuously increasing the DPS is a way for a company to signal strong performance to the stock market.

For example, there is a group of stocks in the S&P 500 index called “Dividend Aristocrats”, which are companies that have raised their dividends for at least 25 consecutive years.

Corporations like Coca-Cola, Colgate-Palmolive, Target, Walgreens, McDonald’s and Walmart have all experienced more than 40 years of continuous dividend growth.

On the other hand, Google and Amazon have famously never declared a dividend, even though other tech giants like Microsoft, IBM, Oracle, Intel, Cisco and even Apple have all been paying out dividends to their shareholders.

So, what is better – high or low DPS?

Why do some companies diligently pay out–and even increase–dividends year-after-year, while others don’t?

Let’s find out >>>

Interpretation: What is "Good" DPS?

The Dividend Per Share is more than just a calculation that determines how much shareholders of a company will get paid in dividends.

DPS is a widely used financial ratio, which helps investors assess the financial performance, health, stability, as well as long-term growth prospects and shareholder value of a company.


Generally speaking, the stronger the dividend payouts from a company, the more attractive the stocks are to investors, which may increase their market value.

But that’s not always the case. Here’s why >>>

High & Increasing DPS

Companies use dividends and DPS to:

  1. Signal strong financial performance to date
  2. Show confidence in future earnings
  3. Share profits with existing shareholders through dividends
  4. Attract dividend-seeking investors

Signal financial performance and shareholder value

The Dividend Per Share ratio suggests how profitable a company has been over a fiscal period. In other words, the company values its shareholders and has been able to generate enough surplus cash to reward them.

Attract dividend-seeking investors

For some investors, dividends are the key reason to buy stocks. The shares represent an ownership stake in a company and the dividends are the owners’ share of the company’s profits. In fact, many investors enjoy a steady source of income from stocks held in dividend-paying companies.

Show confidence in future earnings

Also, dividend payments that are consistent or even growing over time are typically associated with strong financial position, performance and stability. This translates into positive expectations of a company’s growth and future earnings.

Both the promise of a dividend payout and the perceived financial strength of a company can attract more investors, which in turn increases its market value and stock price.

Hence, most companies avoid dividend cuts unless their financial condition requires it or the business undergoes some significant change.

Consequently, a rising DPS is regarded as a positive sign of a company being confident that its earnings growth can be sustained to maintain or improve on the new level of dividend in the future.

Low & Decreasing DPS

Generally speaking, if a DPS ratio decreases or even disappears over time, it may indicate to the market that the financial health of a company could be deteriorating.

This in turn can lead to investors selling their stake in the company, driving the market value and stock price of the company down.


But here comes the twist:

A DPS ratio with a downward trend does not necessarily mean that a company is in financial difficulties.

In fact, there are several valid reasons as to why companies do not issue dividends, such as:

  1. Reinvesting into business operations and growth to increase value of a company

  2. Deleveraging to reduce the level of debt in a company

  3. Paying out more substantial one-time special dividends rather than committing to a consistent annual dividend

  4. Preventing wrong signalling by avoiding high dividend payouts even in particularly profitable years

Reinvesting

A company may pay a smaller percentage of its net income to stockholders, or decide not to pay out a dividend at all, in the favour or reinvesting its residual profits back into the business.

This may lead to an increase in the value of the company due to the expansion, with the potential of a higher dividend in the future.

This approach is common among both mature and rapidly growing companies, for instance:

  • High-growth startup: Reinvests all of its earnings into the business to fund further growth.

  • Established corporation in a mature market: Reinvests all of its profits to fund a new project, develop a new product, purchase a new asset, enter a new market, or pursue an M&A (merger and acquisition) opportunity.

Signalling

When a company reduces or eliminates its dividend policy, the market can regard it as a negative sign.

Here are 3 ways how companies overcome this problem:

1. Avoid High Dividend

Some companies maintain a stable–or only slowly increasing–DPS, by avoiding high dividend payouts even in particularly profitable years.

2. One-time Special Dividends

Similarly, companies that are doing well overall but their income fluctuates significantly between periods may prefer not to commit to consistent dividend payouts and increases.

Instead, they may choose to reward shareholders with one-time special dividends whenever the time is right, which then tend to be more substantial than a typical regular dividend.

3. No Dividends

Other companies do not issue dividends at all to avoid this problem completely.

In fact, some believe that dividends should not actually impact the price of a company stock. This is called dividend irrelevance theory.

Afterall, the investors can sell part of their stockholding if they are in need of cash.

Holistic View

In conclusion, the stock with the highest dividend payout is not always the best choice. There is a wide variety of factors that might influence the health of a company and its ability to distribute dividends to its shareholders.

Therefore, the DPS should be analyzed in conjunction with other financial metrics and non-financial factors to gain a holistic understanding of a company for the purpose of an investment.

Comparing “Apples to Apples”

The DPS ratio is often disclosed by companies themselves (e.g., in financial statements or investor materials), so it does not need to be calculated by investors and analysts.

While this may be convenient, make sure that you understand the basis on which the DPS was calculated (e.g., check the notes to financial statements), especially if you are comparing DPS of different companies against each other.

Examples of DPS calculation inputs to consider:

  • Time period (e.g., quarterly, annual)
  • Types of shares (e.g., primary/secondary common stock; preferential shares)
  • Form of dividend payment (e.g., cash, stock, property)
  • Shares issued (including treasury stock) or outstanding (excluding treasury stock)
  • Cut-off point (e.g., number of shares at a specific point in time; weighted average over a period of time)
  • Gross/net amount (i.e., pre/post tax)

Pros vs. Cons of DPS

What are the main benefits and disadvantages of the DPS ratio?

Pros & Cons of Dividend per Share
Pros Easy ratio to calculate and understand
Widely used in the investment community
Practical as the result directly translates into shareholder income
Cons No context
No indication of actual return on investment (the ratio does not take into account share price, such as original purchase price vs. current market price)
No indication of profit per share distributed versus earned (not distributed)

DPS vs. EPS

The main difference between Dividend per Share (DPS) and Earnings per Share (EPS) is that the DPS is a proportion of EPS that actually gets paid out to shareholders each year.

DPS vs EPS
Difference DPS EPS
Measure: Measures the portion of a company's earnings paid out to shareholders for each outstanding share. Measures net income generated per each outstanding share of a company.
Use: Way for a company to signal financial performance and expectations to the market through dividend payouts. Indicator of a company's profitability. Variable in determining share price.
Numerator: Dividend Amount Net Income
Calculation Formula: Dividend Amount ÷ Outstanding Shares Net Income ÷ Outstanding Shares
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Emilie N., FCCA, CB, MBS
Emilie N., FCCA, CB, MBS

Emilie is a Certified Accountant and Banker with Master's in Business and 15 years of experience in finance and accounting from large corporates and banks, as well as fast-growing start-ups.

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