In this article we will define and discuss how to calculate dividends per share. While a dividend is a distribution of profits by a corporation to its shareholders, dividends per share is the amount of dividend a company pays for every share an investor owns.
The dividend per share (DPS) is an important measure for investors, as it gives them insight as to how much of an income they might generate by investing in a given company.
Also an increase in DPS shows the management’s team confidence in the company’s future profits.
Reasons as to why Companies Issue Dividends.
- To attract investors. Many investors are attracted to dividend-paying companies as they view them as a steady income source.
- To signal the company’s strength. Dividend payments are typically associated with a strong company with positive expectations about its future earnings.
Reasons as to why Companies May Not Issue Dividends
- Rapid growth. A company that is growing rapidly most likely won’t pay dividends. The earnings of the company are instead reinvested to help fund further growth.
- Internal investments opportunities. A mature company may hold onto its earnings and reinvest them.
- If a company originally issues dividends but decides to pull back on its dividend payout, it can create unfavorable signaling for the company. Therefore, companies may avoid paying dividends at all to avoid this problem.
Formula to Calculate Dividends per Share.
Outstanding shares are common stock authorized by the company, issued, purchased and held by shareholders.
Example:
An investor wanted to invest in a company but before that, he wanted to know dividends per share, so she used data from another shareholder in the company. The total annual dividends of the shareholder was Sh. 12,000,000 and the number of the outstanding common stock for the year was 180,000. Calculate the dividend per share of the company.
Therefore, the value of the dividends per share is Sh. 66.67.
