One of the many reasons why investing in stocks is a good idea is because of the dividends they give. This distribution of a company’s profits helps instil good faith among investors. Let's dive into dividends per share.

Defining Dividend Per Share (DPS)

Dividends per share is a financial measure that shows how much of a company's earnings are given to each shareholder per share. If a company makes money, it can choose to give that money to its shareholders as dividends or use it to grow the business. Dividend per share shows how much money a company gave for each share during a specific period of time.

Understanding The Formula

There are two methods via which dividends per share can be calculated.

Method #1. Dividend per share = total dividends paid / shares outstanding

Method #2. Dividends per share = earnings per share x dividend payout ratio

Here, dividend payout ratio = total dividends / net income

Calculating DPS From An Income Statement

To estimate a company's dividend per share, you can use its income statement as long as it consistently pays out the same percentage of earnings as dividends.

To calculate the dividend per share:

1. Find the net income of the company, usually listed at the end of an income statement.
2. Determine the number of outstanding shares from the company's balance sheet.
3. Divide the net income by the outstanding shares to get the earnings per share (EPS).
4. Multiply the EPS by the payout ratio to get the dividend per share.

Understanding With An Example

ITC has distributed annual dividends of ₹20 lakh over the past few years. Shares outstanding at the start of the time frame were 400,000, and shares at the conclusion were 700,000.

Here's how to determine ITC dividends per share:

• To determine the average number of outstanding shares, use the simple average formula: (400,000 + 700,000) / 2 = 550,000.
• The number of outstanding shares at the beginning was 400,000; at the end, it was 700,000.
• The total value of dividends paid per year was ₹20 lakh.

Using the Dividend Per Share (DPS) formula, we get:

DPS = Dividend / Number of shares = ₹20 lakh / 5.5 lakh shares = ₹3.64 per share.

The Value Of Dividend Payments

Draw In Investors

Several investors value dividend payments and see them as an income stream. Companies that pay dividends are therefore more attractive to them.

Highlight The Strength Of A Company

Dividend payments symbolise a strong company and boost investors' confidence in its future earnings. This can increase the market value of the company's stock. However, companies may choose not to issue dividends for various reasons.

Accelerated Pace Of Growth

Companies that grow rapidly don’t ordinarily issue dividends. Instead, they reinvest their earnings to fund more growth.

Investment Opportunities

Mature companies may choose to hold onto their earnings and reinvest them. This money can also be used to pay for new assets or projects or carry out mergers and acquisitions.‍

Incorrect Signalling

Companies are often seen in a bad light for reducing or stopping dividends after issuing them. To avoid this, some companies choose not to pay dividends at all.

Conclusion

Dividend payments can help attract investors, indicate the strength of a company, or provide investment opportunities. However, companies may choose not to issue dividends for various reasons. While dividend payments are an important factor to consider when investing, it should not be the only factor. An investor should also consider the company's financial health, management, and industry trends.

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Frequently Asked Questions

1. How do I calculate dividends per share in Excel?

To calculate the dividend per share, divide the annual dividend by the number of outstanding shares. On Excel, use the formula “=B8/B9” with cell B8 representing the annual dividend amount and cell B9 representing the number of outstanding shares.

2. How to calculate dividends per share in India?

You can calculate the dividend per share using either one of the following formulas.

Method #1. Dividend per share = total dividends paid / shares outstanding

Method #2. Dividends per share = earnings per share x dividend payout ratio

3. What is a good dividend per share?

A good dividend should attract investors seeking dividend income without hindering the company's growth. Keep in mind that growth-oriented companies that don't pay dividends aren't necessarily bad investments.

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