Dividend per Share (DPS) Definition & How To Calculate Formula
Investing in the stock market can be a great way to grow your wealth, but what if you're also interested in earning a regular income from your investments? Dividend Per Share (DPS) is a handy metric that gives you an idea of how much income you can expect from a company's stock.
What Is Dividend per Share (DPS)?
Dividend per Share (DPS) is a financial metric that tells you the amount of money you could potentially earn for each share of a company's stock you own. Companies distribute a portion of their profits to shareholders in the form of dividends, usually on a quarterly or annual basis. DPS is calculated by dividing the total dividends paid by the number of common shares outstanding.
It's calculated using the formula:
DPS = Total Dividends Paid / Number of Shares Outstanding.
What Is a Good Dividend Ratio?
A good dividend ratio, often referred to as the dividend yield, is a percentage that shows how much a company pays out in dividends relative to its stock price. Generally, a higher dividend yield is considered attractive for income-oriented investors. However, an extremely high yield could be a red flag, indicating that the company may not be able to sustain such payments in the long term.
The formula for calculating dividend yield is:
Dividend Yield = (Dividend per Share / Stock Price) x 100
What Is Dividend per Share (DPS)?
Let's say Company A's stock is trading at US$100 per share and it pays an annual dividend of US$5 per share. The dividend yield would be calculated as follows:
Dividend Yield = (5 / 100) x 100 = 5%
In this example, the dividend yield or ratio is 5%, which is considered a decent yield for most income investors.
What Is an Example of a Dividend Ratio?
EPS stands for Earnings per Share, a financial metric that represents the portion of a company's profit allocated to each outstanding share of common stock. It's a key indicator of a company's profitability and is often used by investors to assess financial performance.
EPS is calculated by dividing the net income of a company by the number of outstanding shares of common stock. The formula for calculating EPS is:
EPS = (Net Income - Dividends on Preferred Stock) / Number of Outstanding Shares
EPS is often reported on a quarterly or annual basis, and it's used in various other financial ratios and metrics, such as the Price-to-Earnings (P/E) ratio and the payout ratio for dividends.
Understanding EPS can help investors evaluate a company's profitability, financial health, and potential for future growth. It's also a critical component for calculating other important metrics like the payout ratio, which helps investors understand how sustainable a company's dividend payments are.
What Is the Payout Ratio?
The payout ratio is a measure of how much of a company's earnings are returned to shareholders as dividends. A lower payout ratio may indicate that the company is reinvesting more of its earnings back into the business, while a higher ratio suggests that more earnings are being distributed as dividends.
The formula for calculating payout ratio is:
Payout Ratio = DPS / EPS
How Do You Calculate Dividends Paid?
To find the total dividends paid by a company, you can use the formula:
Total Dividends Paid = DPS x Number of Shares Outstanding
For example, if a company has a DPS of $2 and 1 million shares outstanding, the total dividends paid would be:
Total Dividends Paid = $2 x 1,000,000 = $2,000,000
DPS: Key Takeaways
- Dividend per Share (DPS) is a crucial metric for investors looking for income-generating stocks. It tells you how much you could earn per share of a company's stock through dividends.
- A good dividend yield is important for income-oriented investors. A higher yield is generally better, but extremely high yields may be unsustainable.
- The payout ratio is a measure that shows what percentage of a company's earnings are being paid out as dividends. A lower ratio often means the company is reinvesting more in the business.
- The retention ratio is the opposite of the payout ratio. It indicates how much of a company's earnings are being retained or reinvested in the company, rather than being paid out as dividends.
- Earnings per Share (EPS) is a key financial metric that represents a company's profitability. It's used in calculating other important metrics like the payout ratio, helping investors understand the sustainability of a company's dividend payments.
These takeaways offer a quick summary of the essential points for understanding dividends and EPS, helping you make more informed investment decisions.