Dividend per share definition
/What is Dividend per Share?
Dividend per share is a measure of the dividend payout per share of a company’s common stock. The measure is used to estimate the amount of dividends that an income investor might expect to receive if he or she were to buy a company's common stock. The measure is especially effective when tracked on a trend line, since a consistent amount per share indicates management's willingness to make consistent payouts to investors. In addition, an increasing trend of dividends paid indicates management’s belief that the business has sufficiently robust cash flow to support dividend payments.
This measure is not commonly used by growth investors, who are more concerned with the intentions of management to plow funds back into operations, thereby increasing the value of the company and the price per share. If anything, these investors prefer not to invest in a business that issues dividends at all.
How to Calculate Dividend per Share
To calculate dividend per share, add together the sum of all periodic and special dividends in a year, and then divide by the weighted average number of common shares that were outstanding during the same period. The dividend per share formula is as follows:
(Sum of all periodic dividends in a year + Sum of all special dividends in a year) ÷
Weighted average number of common shares outstanding during the year
An argument can be made that special dividends should be excluded from the aggregation of dividends paid per year, if the intent is to project what the dividend per share will be in a future period. This is because there is no assurance that these special dividends will be issued again.
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Example of Dividend per Share
A business issued $10,000,000 of quarterly dividends in the past year, plus an extra one-time $2,000,000 special dividend. During that period, the business had a weighted average of 3,000,000 shares of common stock outstanding. Based on this information, its dividend per share is:
$12,000,000 Total dividends paid ÷ 3,000,000 Shares = $4.00 Dividend per share
What is a Good Dividend per Share?
A reasonable dividend per share is between 2% and 6% of the stock price. That being said, a business with strong growth prospects may prefer to retain all of its excess cash in order to fund its growth; in this situation, the business might not pay any dividend at all, and yet represent quite a good investment, because of the expectation for its stock price to increase over time. Conversely, a business that is paying out a high dividend per share may be doing so because its board of directors sees no internal use for the cash, and so is giving it back to investors; in this case, there is little likelihood that the stock price will increase over time. If anything, its stock price may decline as customers take their business elsewhere.