This article will explain to you what dividends are and how to calculate dividends per share.
If you are someone who is contemplating to invest in shares of a company, you should be aware of how investing in shares can be profitable for you. Income from shares comes in two forms. Firstly, over time, the value of the shares gets appreciated. Say, for instance, you buy 100 shares of a company today at USD 10 each. After a few months or sometimes even days, the value of the share increases to USD 15 per share in the stock market. If at that point, you sell your shares, you will be making profits of USD 5 per share, which is your income from making investments in share. The second earnings from share come in the form of dividends, which companies pay to their shareholders on a quarterly or yearly basis. In this article, you will learn how to calculate dividends per share.
Dividends can be defined as a small part of the earnings and profits that the company makes in a given period of time that is returned to the shareholders, depending upon the number of shares of the company that they hold. It is a kind of profit-sharing mechanism followed by companies to reward their shareholders for being an investor in the company.
Most of the companies pay regular dividends to their shareholders, unless they are facing some financial problems. By paying them on a regular basis, companies project themselves as investor-friendly and thus, improve upon their reputation in the stock market. A company which pays a high dividend regularly, projects itself as a company with sustainable growth. They are paid in cash, however in some cases, they may be paid as stocks too. They can be fixed, also known as preferred dividends, or they may be variable, known as common dividends, which change in accordance to the profits made by the company.
Formula to Calculate
DPS = (D – SD) / S
i.e. Dividend per share = (Sum of dividends paid over a given period including the interim dividends – any special, one time dividend) / Number of ordinary shares outstanding issued for the period)
Let’s take an example. Suppose, there is a company XYZ, which paid dividends totaling USD 350000 in a year. The outstanding shares of XYZ are three million. In between it paid a special, one time dividend of USD 80000. So, its DPS would be:
DPS = (USD 350000 – USD 80000) / 3000000 = 0.09
Thus, in the above calculation, 0.09 is the DPS issued by the company XYZ to its shareholders.
Important Dates for Payment
All first time investors in shares should be aware of two very important dates related to the payment of dividends. The first is the declaration date on which it is decided by the company how much will be paid to the shareholders and when it will be paid. The second is the ex-dividend date, which is around two to three days prior to the record date. This is the date on which the company makes a list of all the shareholders. So, whatever pending transactions are there, they should be completed by the shareholders before this date to ensure that they are eligible for the payment.
If you are someone new to stock investing, make sure that you study the markets really well and undertake thorough stock research, before you finalize on companies that you want to invest in. A good idea is to always keep a mixed, diversified portfolio, i.e., buy shares of companies in different sectors so that even if one sector sees a downfall, your losses can be offset by the profits from shares in other sectors. All the best!