higher dividend per share is associated with

Dividend Per Share

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Author: Sarthak Bhalerao

Introduction

You must have heard in the news that recently BPCL announced an Rs58/ share dividend in September 2021. So, whenever you invest in the shares of a company you become the owners of the company. A dividend is given to the owners (shareholders) whenever the company makes a profit. So, what exactly is a dividend? What is the dividend per share? Let us have a look at all these things.

Table of Contents

  1. What is Dividend and what is Dividend Yield?
  2. What is the dividend per share?
  3. Types of dividends
  4. Conclusion

What is Dividend and what is Dividend Yield?

A Dividend is a distribution of cash or stock to the company’s shareholders as a reward. The decision of giving dividends is made by the Board of Directors. This decision is then approved by the shareholders through their voting rights. The dividend is a part of the profit that the company shares with their shareholders. It is not mandatory for companies to give dividends but giving dividends may attract a lot of new investors. The dividend is declared on a per-share basis. This dividend is paid to the company’s shareholders on the ex-dividend date. All the investors who have that company’s share in their portfolio on the ex-dividend date are eligible to get the dividend. [1][2]
The dividend yield is expressed as the dividend per share divided by the current market price of that stock [3]. It is expressed in percentage. In other words, dividend yield calculates the percentage of a company’s share price that is to be paid to its shareholders. So, if a company’s share price is $60 and they declare a dividend of $3.5/share, then the dividend yield is 3.5/68 = 0.058  =5.8%

What is the dividend per share?

In simple words, dividend per share (DPS) is calculated by using the Total dividend and the total number of outstanding shares [4]. Its formula is:

The dividend per share is calculated either quarterly or annually. A consistent increase in DPS over time can also give investors’ confidence that the company’s management believes that its earnings growth can be sustained [5]. All the dividends must be included in total dividends while calculating DPS. Let us look at all the types of dividends there are which are essential for the calculation of DPS.

Types of Dividends

1. Cash Dividend

A cash dividend is a type of dividend which is paid in cash to the company’s investors. Cash dividends are the most common type of dividends given to the shareholders. These are paid on a per-share basis, and they are directly credited to the bank account. Cash dividends are further classified into [6]:

    • Special dividend: Special dividends are one-time dividends that a company pays to its shareholders in the form of cash. Since it’s a one-time affair, special dividends are also tied to particular events which may have led to windfall gains for the company.
    • Interim Dividend: An interim dividend is a dividend payment made before a company’s annual general meeting (AGM) and release of final financial statements.
    • Final Dividend: The final dividend is declared for a preceding financial year and after the accounts and financials have been prepared for the fiscal year under consideration.

2. Stock Dividend

Stock dividend is when a company issues extra shares to its shareholders and gives them as a bonus. For example, if a company issues a 3:1 bonus, this means that the shareholder will be getting an additional 3 shares for every 1 share he has in his portfolio. So, if you have 15 shares of that company, you will get an additional 15/3=5 shares.

Conclusion

A high DPS tells us that the company is performing well, is turning in good profits and has enough liquid cash so that it can reward its shareholders. Dividends paid are also helpful for the company to get tax benefits. On the other hand, the dividend money is not being re-invested in the company. This can serve as a not so good sign. This means that high dividend-paying companies should not be considered as the deciding factor to invest in a company. Also, a high dividend giving company might be fundamentally flawed so do not forget to do your own research regarding the company.

References

[1]

A. Hayes, “Dividends,” Investopedia, 26 August 2021. [Online]. Available: https://www.investopedia.com/terms/d/dividend.asp. [Accessed 18 September 2021].

[2]

“Dividend,” Corporate Finance Institute, [Online]. Available: https://corporatefinanceinstitute.com/resources/knowledge/finance/dividend/. [Accessed 18 September 2021].

[3]

“Definition of ‘Dividend Yield’,” The Economic Times, [Online]. Available: https://economictimes.indiatimes.com/definition/dividend-yield. [Accessed 18 September 2021].

[4]

J. Chen, “Dividend Per Share (DPS),” Investopedia, [Online]. Available: https://www.investopedia.com/terms/d/dividend-per-share.asp. [Accessed 18 September 2021].

[5]

“Dividend Per Share (DPS),” Corporate Finance Institute, [Online]. Available: https://corporatefinanceinstitute.com/resources/knowledge/finance/dividend-per-share/. [Accessed 18 September 2021].

[6]

“Dividend Per Share,” Groww, [Online]. Available: https://groww.in/p/dividend-per-share/. [Accessed 18 September 2021].

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