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Dividend per Share (ratio)

Dividend per Share as the name suggest is the amount of dividend earned by each ordinary share of the

company. Where EPS (Earnings per Share) gives us the information of how much earned by each ordinary share, the DPS (Dividend per Share) tells us how much have been distributed by the company.

FORMULA

Dividend per share  =

Total Dividend


Toral Number of Ordinary Shares

 

EXAMPLE

For calculation of this ratio there are two separate figures to consider i.e.

  • Total Dividend: is the amount announced by the company to be distributed as dividend to ordinary shareholders.
  • Total Number of Ordinary Shares: are shares other than preferred shares that are considered ordinary i.e. no exceptional rights are associated with such shares (for more detail please read interpretation).

Assuming that $400,000 has been announced by the company to be distributed as ordinary dividend, the ratio will be calculated as follows.



Dividend per share  =

4,00,000


1,00,000

Dividend per share  =

4 Dollars

Data used in calculating ratio is extracted from Hypothetical Financial Statements. (See Hypothetical Financial Statements used in calculation).

MEASUREMENT UNIT

Dividend per Share (ratio) is measured in Dollars.
Using the above example, each $1 invested in ordinary equity shares has received 4 dollars as dividend.

INTERPRETATION

How to interpret the ratio

Dividend is announced for ordinary shareholders. We know that business arranges funds for running its operations and two ways of arranging such funds are either equity investment or borrowings.

The equity investment can further be bifurcated into Ordinary Shares and Preferred Shares. Company (due to some reasons) allows certain persons to buy the preferred stock of the company i.e. the stock which has privileges. These privileges may include “Guaranteed dividend which is treated as finance cost” and “Redemption of Shares after a certain period”. Therefore dividend has to be paid, at a certain constant rate, to these shareholders whether company earns sufficient amount or not.

On the other hand Ordinary shareholders are persons who have no special rights associated with their investment. If earnings will be sufficient then they will be paid a dividend. Also this amount of dividend will fluctuate from year to year based on the amount of earnings during the year. Therefore the announcement of dividend does matter for Ordinary Shareholders and not for preferred shareholder and for the same reason DPS (dividend per share) is calculated for ordinary shareholders.

Users’ needs addressed by the ratio

Existing Shareholders want to know what their investment has returned during the current year and whether it is more or less from last year. This way existing shareholder gets some idea of company’s performance during the year.
Potential Investors will invest only if they have handsome return on their investment. DPS shows the trend of company’s earnings. Thus decision making becomes easier for them.

Management monitors the DPS to control the funds for its future requirements as well as to have a better image in the market.
(You must have an understanding of users’ needs of financial statements; please refer the topic 1- financial statement users for details).

 

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