Calculating Your Dividend per Share

The dividend per share is the amount you earn periodically for the investment that you made in a company by purchasing its share or stock. A publicly traded, or listed, business corporation earns profit through its business operations. The profit thus earned can either be used for reinvestment purposes or shared among its shareholders. If the company decides to distribute the earned profits, it declares a dividend. Generally, dividends are fixed per share. Hence, a shareholder will receive a dividend that is directly proportional to the number of shares he has of that particular corporation. Dividends are usually paid periodically (either quarterly or annually). These are declared periodically by the board of directors along with financial results.

Sample Calculation of DPS

Dividend per share calculation can best be explained with an example. Let us assume Amino Chemicals & Fertilizers, Inc., (ACFI) to be the corporation for which the dividend per share has to be calculated. We will assume the following figures for ACFI:

Total profit after tax (TPAT):

$5.2 million

Retained profit (RP):

$1.2 million

Number of outstanding shares (NOS):

50 million


The dividend per share (DPS) is calculated with this formula: (TPAT - RP) / NOS.

Plugging the ACFI figures in, we get a DPS of 8 cents: (5.2 - 1.2) / 50 = 8 cents.

Importance of Dividend per Share

Whenever a company declares dividend for its shareholders, it means the company has been making profits. Investors look for additional bonuses, like dividends, before investing their hard-earned money in a company. Therefore, a company that regularly pays dividends is able to attract more investors. Stocks of such companies are termed income stocks in the financial market.

Investors also need to know a company's dividend per share figures because these are needed to calculate dividend yield. The dividend yield is calculated by multiplying the DPS by the share price. In our example, if the price of a share of ACFI is $2.6, then the dividend yield would turn out to be 0.8 / 2.4 = 0.33, or 33 percent.

Taxation

The dividend amount is doubly taxed, once as a corporate tax to the issuing corporation and a second time as the income tax of the shareholder. Thus, some investors wish to use the dividend amount for buying more of the company's stocks. This way the investor is able to increase the shareholding in the company, and no tax has to be paid unless the shares are sold. This is precisely the reason few companies decide to declare dividends even if the company is making handsome profits.

Last Word

It is best to purchase stocks of a company with good dividend yield figures. As an investor, you can cash in your gains by selling the stocks when the price is high enough. Even if the company has decided to cut down the dividend percentage, first find out the reason behind it and then reconsider your investment options.

If you are a fairly new investor, consider speaking with a financial adviser about dividends.


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