Understanding Dividend Per Share (DPS)

Understanding Dividend Per Share (DPS)

Let me tell you directly: Dividend per share (DPS) is the sum of declared dividends issued by a company for every ordinary share outstanding. It serves as a tangible benchmark for evaluating a company's financial health and its commitment to shareholders. When you calculate the total dividends issued per ordinary share, you get an essential measure of potential income, which is critical for assessing a firm's profitability and stability.

You calculate DPS by dividing the total dividends issued by a firm, including interim dividends, over a period like a quarter or a year, by the number of outstanding ordinary shares. Often, a company's DPS comes from the dividend paid in the most recent quarter, which also helps in calculating the dividend yield.

Diving Deeper into Dividend Per Share

DPS matters to you as an investor because the amount a firm pays out in dividends directly translates to your income as a shareholder. It's the most straightforward figure you can use to calculate your dividend payments from owning shares of a stock over time.

If you see a consistent increase in DPS over time, that gives you confidence that the company's management believes its earnings growth can be sustained. Here's what else you can derive from DPS: A consistent or increasing DPS suggests the company generates enough profits and cash flow to support regular payments, pointing to financial stability. A higher DPS often means the company prioritizes rewarding its investors. Changes in DPS reveal the company's dividend policy—increases show commitment to returns, while cuts might indicate financial stress. When you combine DPS with the stock price, it helps calculate the dividend yield, so you can compare income potential across stocks. Established companies with stable cash flows tend to have higher DPS, whereas growth-oriented firms might have lower or no DPS as they reinvest profits. For income-focused investors like you, a history of stable or growing DPS suggests the firm is reliable for future dividends.

How to Calculate Dividend Per Share

To calculate DPS, use this formula: DPS = (D - SD) / S, where D is the sum of dividends over a period (usually a quarter or year), SD is special, one-time dividends in the period, and S is ordinary shares outstanding for the period.

Add up dividends from the entire year, excluding special dividends but including interim dividends—those are dividends declared and paid before annual earnings are determined. If the company issues common shares during the period, use the weighted average of shares, similar to how you calculate earnings per share (EPS).

For example, if ABC company paid $237,000 in dividends last year, including a $59,250 one-time dividend, and has 2 million shares outstanding, its DPS is ($237,000 - $59,250) / 2,000,000 = $0.09 per share.

Financial Metrics Related to DPS

DPS connects to several financial metrics that consider a firm's dividend payments, such as the payout and retention ratios. You can calculate DPS by multiplying a firm's payout ratio by its EPS, where EPS is net income divided by outstanding shares, usually found on the income statement. The retention ratio measures the proportion of earnings retained, not paid out in dividends.

Real-World Examples of DPS

A company with a rising DPS signals strong performance to the market. Many dividend-paying companies focus on increasing their DPS, so established ones often show steady growth. When you chart it, their DPS over time looks like a set of stairs.

Take Coca-Cola Co. (KO)—it has paid a quarterly dividend since 1920 and consistently increased its annual DPS. In 1996, it was $0.125; in 2000, $0.17; in June 2012, $0.51. There was a drop to $0.255 in late 2012 due to a two-for-one stock split, which doubled shares but didn't change the total dividend received. Be careful with historical DPS; use adjusted dividends to account for splits. Coca-Cola is a dividend aristocrat, having increased payouts for at least 25 consecutive years.

Similarly, Walmart Inc. (WMT) has increased its annual cash dividend since 1974. Since 2015, it added at least 4 cents each year, reaching $2.08 in 2019. In February 2024, it announced $0.83 per share post-split, a 9% increase.

What Is the Dividend Discount Model (DDM)?

The DDM estimates a stock's intrinsic value based on the present value of its expected future dividend payments. It assumes a stock's worth is the sum of all future dividends, discounted to present value using a specific rate of return. This gives you a basis to see if a stock is overvalued or undervalued compared to its market price, typically using the most recent DPS.

What Are Dividend Aristocrats?

Dividend aristocrats are S&P 500 companies that consistently pay and annually increase dividends. The S&P 500 Dividend Aristocrats index, created in 2005, includes firms that have raised dividends for at least 25 years, like Johnson & Johnson (JNJ) and IBM. An ETF tracking this is the FT Vest S&P 500 Dividend Aristocrats Target Income ETF (KNG).

What Is the Retention Ratio?

The retention ratio is the proportion of earnings kept as retained earnings to grow the business, rather than paid as dividends. It's the opposite of the payout ratio, which measures profits sent to shareholders as dividends.

What Is a Good Dividend Per Share?

A good DPS typically ranges from 2% to 6% of the stock price, meaning $0.02 to $0.06 in dividends per share. What counts as good depends on the industry, growth stage, and market conditions. Established firms in utilities or consumer staples often have higher DPS, while growth companies reinvest profits.

Do You Pay Taxes on Dividends?

Yes, but it depends on your location and dividend type. Qualified dividends are taxed at 0%, 15%, or 20% based on income and filing status—if your income is below thresholds, you might pay nothing. Nonqualified dividends are taxed as ordinary income, up to 37% for high earners.

Bottom Line

Dividend per share represents the cash returned to shareholders per ordinary share, calculated by dividing total dividends by outstanding shares. A rising DPS suggests financial health and commitment to returns, so analyze it with dividend yield and payout ratios to make informed decisions on income potential.