Companies are in the business of making a profit. They’re also focused on what to do with the profit: hold it in cash, reinvest it in current operations or expansion, or pay it to shareholders as a dividend.
A dividend is like a reward to shareholders for keeping money invested in the company. It is typically expressed as a per-share value, just as a company’s profit is expressed in per-share terms.
What is dividends per share and why does it matter to investors?
Dividends per share is the amount of money a company pays out in the form of dividends for each share. To derive this figure, the total amount paid in dividends is divided by the total number of shares outstanding.
Dividends per-share is essential for investors because it is a key way to measure the return on their money. It is often used in calculations to value a stock and to compare the relative value of shares of different companies.
Dividends can be attractive to investors in several ways:
- They represent a stream of income, which can increase regularly over time as companies demonstrate steady earnings growth. This is particularly important for investors as they reach retirement.
- A regular dividend policy can signal to investors that the company is stable and won’t be reducing or eliminating dividends.
- Dividends can be reinvested for further compounding of returns and building wealth.
Most large companies pay dividends—about three-quarters of those in the Standard & Poor’s 500 Index, for example—while about half of small-cap companies pay dividends. Older, well-established companies with more predictable earnings tend to be the most reliable dividend payers. Industries such as banking and finance, energy, health care, pharmaceuticals, and utilities have greater numbers of dividend-paying companies. Master limited partnerships and real estate investment trusts (REITS) pay large dividends because they operate under different tax regulations.
Investors should understand that while dividend payments are nice when they are steady, they are not guaranteed. Dividends are solely at the discretion of a company and its board of directors. Adverse events can cause companies to reduce or suspend dividends. Disney, for example, suspended dividends during the COVID-19 pandemic in 2020 and, as of January 2022, had not restarted them.
Some of the biggest companies in the S&P 500 don’t pay dividends. Among them are Alphabet (parent of Google), Amazon, Berkshire Hathaway, and Meta (Facebook). They choose to reinvest all their earnings to fuel further growth and a higher stock price.
Types of dividends
Most companies that pay dividends do so on a regular basis—usually quarterly in the U.S.—and almost all pay in cash.
Other forms of dividends include:
- Stock dividends, through issuing new shares to current shareholders, on a pro rata basis. For example, a company declaring a 5% stock dividend would issue five new shares to a holder of 100 shares; a holder of 200 shares would get 10 new shares.
- Special dividend, a one-time payment. Special dividends are rare, and happen when a company has accumulated a large amount of cash for which it has no immediate purpose. Notable examples include Microsoft, which in 2004 paid $32 billion, or $3 a share, when its regular quarterly dividend was 8 cents a share.
- Spin-off, the distribution of shares of a subsidiary business into a separate publicly traded company, on a pro-rata basis to current shareholders. For example, if a company has a stock price of $200 and it spins off a subsidiary that represents 25% of its revenue and earnings, shareholders would now have a company share valued at $150 and a share of the spin-off valued at $50.
Common and preferred shares
Dividends usually are paid on two types of shares issued by companies:
- Common shares, or ordinary shares. A common share is a unit of equity ownership interest in the company, with voting rights. Most companies have a single class of common shares; some have dual classes with one class having more voting rights than the other.
- Preferred shares, which have no voting rights but are given priority in dividend payments—they get paid before any common-stock dividends. Typically the dividend is a fixed amount. For example, a 6% annual dividend on shares with a face value of $1,000 would pay $60. Preferred shares are a hybrid of a stock and bond. Few companies issue preferred stock.
Computing dividends per share
A company must first calculate its per-share earnings for the period (quarter or year), before deciding on a dividend. The formula is:
Earnings per share = Net income – preferred dividends/common shares outstanding
Net income minus preferred dividends will often appear on company income statements as “net income available to common shareholders.”
Then the company must decide on the payout ratio: what proportion of earnings should be paid as dividends. Let’s say a company has earnings per share of $10 and it decides on a 25% percent payout ratio. The dividend is then:
$10 X 0.25 = $2.50 per share
Companies usually cite a fully diluted number of common shares, which assumes that any stock options are exercised, increasing shares outstanding and thus diluting per-share earnings and dividends. It’s a more conservative accounting of per-share interests. Companies also calculate weighted average shares outstanding, to account for any changes in the number of shares during the period.
Let's say a company has earnings (also called net income or profit) of $100 million, and has 1 million shares outstanding. Then:
$100 million/10 million shares = $10 earnings per share (or EPS)
Now let’s assume the company decides to keep $90 million of the earnings to reinvest in its business. This is called retained earnings. The company decides to use the rest of the earnings, $10 million, to pay shareholders as a dividend. So:
$10 million/10 million shares = $1 per share dividend
Investors can use ratios to evaluate companies in various ways regarding earnings and dividends:
- Dividend yield. This is the dollar amount of dividends expressed as a percentage of the current stock price. So if a company pays an annual dividend of $3 and its shares are trading at $100, the dividend yield is 3%. Investors can compare dividend yields among companies and industries, as well as compare dividend yields against bond yields. Dividend yields in the 2020s have been near record lows because share prices rose much faster than dividends. The aggregate dividend yield for the S&P 500 was 1.24% in 2021, the lowest in two decades.
- Earnings yield. This is per-share earnings as a percentage of stock price. If earnings for the most recent year were $12 per share, and its stock price is $100, the earnings yield is 12%. An earnings yield much higher than a dividend yield may indicate that a company has held off in increasing its dividend.
- Payout ratio. This is the percentage of earnings paid as dividends. A company that has $5 in per-share earnings and pays a dividend of 50 cents has a 10% ($0.5/$5) payout ratio. The average ratio among S&P 500 companies in 2021 was about 29%. Investors may regard lower payout ratios as a better starting point, with room to grow steadily over time. A much higher ratio could suggest a company is paying out too much to shareholders and might need to reduce the dividend and retain more earnings to invest in its business.
- Retention ratio. This is the flip side of a payout ratio—the percentage of earnings retained by the company for reinvestment. A dividend payout ratio of 10% means a retention ratio of 90%, for example.
Alternatives to dividends
Companies have other ways of rewarding shareholders, including:
- Buybacks. A company’s repurchase of shares is another way of rewarding shareholders by reducing the number of shares outstanding, thus boosting earnings per share. Higher earnings per share can help boost the stock price.
- Stock splits. There’s no immediate reward for shareholders in a stock split, but by lowering the share price, it may create new investor demand for the shares and thus boost the share price. A recent example is Alphabet, parent of Google, which announced a 20-for-1 split as its shares traded near $3,000. The split will mean a share price of about $150, making Alphabet shares affordable to more investors.
Dividends per share vs. earnings per share
Earnings per share is the amount of a company’s earnings (net income) allotted to each share outstanding. Dividends per share is the portion of earnings the company’s board decides to return to shareholders, usually as a cash payment. Companies review their dividend policies quarterly and annually, relative to trends in earnings and cash flow from company operations.
The bottom line
Dividends per share can be a source of income for investors, as well as a boost to long-term compounded returns if reinvested rather than spent. On the other hand, too much focus on dividend-paying companies might mean investors miss out on opportunities among companies that don’t pay dividends but soar in stock market value.
If you’re ready to start growing your capital, Titan is ready for you. Our team of exceptional investment analysts manage hundreds of millions of dollars, investing our clients in actively-managed, long-term strategies with an eye on massive growth potential. Through our award-winning app, you’ll ride shotgun with some of the smartest investment minds in the business. Sign-up takes minutes: get started today.