Understanding Dividend Per Share (DPS): Definition, Formula, and Importance

Definition

Dividend per share (DPS) is the sum of declared dividends issued by a company for every ordinary share outstanding.

Dividend Per Share (DPS) serves as a tangible benchmark for evaluating a company's financial health and shareholder commitment. By calculating the total dividends issued per ordinary share, investors gain an essential measure of potential income—a critical metric for assessing a firm's profitability and stability.

DPS is calculated by dividing the total dividends issued by a firm, including interim dividends, over a period (a quarter or a year, typically) by the number of outstanding ordinary shares.

A company's DPS is often derived using the dividend paid in the most recent quarter, which is also used to calculate the dividend yield.

Key Takeaways

Dividend per share (DPS) is calculated by dividing total declared dividends by the number of outstanding ordinary shares, excluding special dividends.
A consistent increase in DPS can signal a company's financial health and commitment to rewarding shareholders.
Investors use DPS to gauge the potential income from investments and compare different stocks.
Companies with stable and growing DPSs, like Coca-Cola and Walmart, are often viewed as financially dependable.
DPS is closely related to financial metrics like the payout ratio and the dividend discount model.

Dive Deep into Dividend Per Share (DPS)

DPS is an important measure for investors because the amount a firm pays out in dividends directly translates to income for the shareholder. It's the most straightforward figure an investor can use to calculate their dividend payments from owning shares of a stock over time.

A consistent increase in DPS over time can also give investors confidence that the company's management believes that its growth in earnings can be sustained. Here is further information that investors can derive from the DPS:

Profitability and cash flow: A consistent or increasing DPS suggests that a company generates enough profits and cash flow to support regular dividend payments. This is a sign of financial stability.
Shareholder value: A higher DPS often means a company prioritizes rewarding its investors.
Dividend Policy: Changes in DPS can show a company's dividend policy. Increases may indicate a commitment to shareholder returns, while cuts might mean financial stress.
Dividend yield: When combined with the stock price, DPS helps calculate the dividend yield, allowing investors to compare the income potential of different stocks.
Maturity vs. growth stage: Established companies with stable cash flows often have higher DPS, while growth-oriented firms might have lower or no DPS as they reinvest profits.
Income reliability: For income-focused investors, a history of stable or growing DPS could suggest the firm is reliable for future dividends.

How to Calculate Dividend Per Share (DPS)

$\begin{aligned} &\text{DPS} = \frac { \text{D} - \text{SD} }{ \text{S} } \\ &\textbf{where:} \\ &\text{D} = \text{sum of dividends over a period (usually} \\ &\text{a quarter or year)} \\ &\text{SD} = \text{special, one-time dividends in the period} \\ &\text{S} = \text{ordinary shares outstanding for the period} \\ \end{aligned}$

To calculate DPS, add dividends from the entire year, excluding special dividends but including interim dividends. Special dividends are only expected to be issued once and so are omitted. Interim dividends are dividends distributed to shareholders that have been declared and paid before a company has determined its annual earnings.

If a company issues common shares during the period, use the weighted average of shares for calculating outstanding shares, similar to 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 would be:

($237,000-$59,250)/2,000,000 = $0.09 per share.

Explore Financial Metrics Related to DPS

DPS is related to several financial metrics that take into account a firm's dividend payments, such as the payout and retention ratios. Given the definition of payout ratio as the proportion of earnings paid as dividends to shareholders, DPS can be calculated by multiplying a firm's payout ratio by its (EPS). A company's EPS, equal to net income divided by the number of outstanding shares, can usually be found on a firm's income statement. The retention ratio, meanwhile, measures the proportion of a firm's earnings retained and, therefore, isn't paid out in dividends.

Real-World Examples of Dividend Per Share (DPS)

A company that has a rising DPS is sending to the market a signal of a strong performance. For this reason, many companies that pay a dividend focus on adding to their DPS. As such, established dividend-paying corporations tend to have steady DPS growth. When charted, as can be seen in the charts below, these firms' DPS over time will look like a set of stairs.

Coca-Cola Co. (KO), for example, has paid a quarterly dividend since 1920 while consistently increasing its annual DPS. In 1996, it was $0.125. In 2000, it was $0.17. In June 2012, it was $0.51. Then, it saw a drop in the last quarter of 2012 to $0.255. But this wasn't because of bad performance. Rather, in 2012, Coca-Cola implemented a two-for-one stock split. This means that for every share investors owned, they received an additional share. While this doubles the number of shares outstanding, it doesn't change the dividend they receive, which would be $0.51. That's why you should be careful when looking at a company's DPS over time. Many financial sites provide the "adjusted dividend," which standardizes the DPS over time to account for stock splits and the like.

As such, Coca-Cola continued its record, as it does to the present, of maintaining or increasing its dividend each quarter for decades (see below; hover over the chart to get the data for individual quarters).

This makes Coca-Cola one of the so-called dividend aristocrats: companies in the S&P 500 index that have increased their dividend payouts for at least 25 consecutive years. This is a prestigious group, as it demonstrates a commitment to returning value to shareholders even during challenging periods.

Similarly, Walmart Inc. (WMT) has upped its annual cash dividend each year since it first declared a $0.05 dividend in March 1974. Since 2015, the retail giant has added at least 4 cents each year to its dividend per share, which was raised to $2.08 in 2019. In February 2024, Walmart announced an annual cash dividend for fiscal year 2025 of $0.83 per share on a post-stock split basis, a 9% increase.

What Is the Dividend Discount Model (DDM)?

The DDM is a method used to estimate the intrinsic value of a stock based on the present value of its expected future dividend payments. The DDM assumes that a stock's worth is the sum of all its future dividend payments, discounted back to their present value using a specific rate of return.

This provides investors with an educated theoretical basis to determine if a stock is overvalued or undervalued compared with its market price. This model typically takes into account the most recent DPS for its calculation.

What Are Dividend Aristocrats?

A dividend aristocrat is a company in the S&P 500 index that not only consistently pays a dividend to shareholders but annually increases the size of its payout. The S&P 500 created the S&P 500 Dividend Aristocrats index in 2005, which is equal-weighted among all the S&P 500 companies that have increased their dividends over the past 25 years. Among them are C.H. Robinson Worldwide Inc. (CHRW), Brown & Brown Inc. (BRO), Stanley Black & Decker Inc. (SWK), Sherwin-Williams Co. (SHW), Aflac Inc (AFL), Colgate-Palmolive Co. (CL), Johnson & Johnson (JNJ), International Business Machines Corp. (IBM), and Lowe's Companies, Inc. (LOW).

An exchange-traded fund that tracks this group is the FT Vest S&P 500 Dividend Aristocrats Target Income ETF (KNG).

What Is the Retention Ratio?

The retention ratio, also called the plowback ratio, is the proportion of earnings kept back in the business as retained earnings. It refers to the percentage of net income that is retained to grow the business, rather than being paid as dividends. This is the opposite of the payout ratio, which measures the percentage of profit sent to shareholders as dividends.

What Is a Good Dividend Per Share?

A good DPS typically falls within the range of 2% to 6% of the stock price, indicating a healthy return for investors. This means that for every share outstanding, companies are paying between $0.02 and $0.06 in dividends. However, what constitutes a "good" DPS depends on the company's industry, growth stage, and market conditions. Established companies with stable earnings, such as those in sectors like utilities or consumer staples, often provide higher DPS, while growth-oriented companies may reinvest profits rather than pay dividends.

Do You Pay Taxes on Dividends?

Yes, but the specifics depend on your location and the type of dividends received. Dividends are classified as either qualified or nonqualified. Qualified dividends are taxed at 0%, 15%, or 20%, depending on your taxable income and filing status.

For instance, if your taxable income is below certain thresholds, you may pay no tax on qualified dividends. Conversely, nonqualified dividends are taxed as ordinary income at your standard income tax rates, which can be as high as 37% for higher earners.

Bottom Line

Dividend Per Share (DPS) represents the cash returned to shareholders per ordinary share and is calculated by dividing total dividends by outstanding shares. A rising DPS can suggest financial health and a commitment to shareholder returns, making it a valuable metric for investors. Analyze the DPS alongside metrics like dividend yield and payout ratios to make informed investment decisions and assess income-generating potential.