Dividends per Share and How They're Calculated

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Dividends per share, the payment to investors for each share of stock owned, are usually paid quarterly. Most often, although not always, these payments are paid out of the company's profits.  Often only a portion of profits are distributed and the remainder stays with the company as net income. The ratio of earnings paid out to investors as dividends to investors to those earnings retained by the company is called the dividend payout ratio.

It's calculated by dividing the company's dividends by its earnings:

                          Dividend payout ratio = declared dividends ÷ total earnings    

Calculation of Dividends per Share

A corporation's board of directors approves the dividend payment to investors for the current quarter. This amount is then divided by the total number of shares outstanding and the money is then distributed on a per share basis to the company's investors. The "dividends per share" figure that you may see on a financial website, however, is almost always based on the payments over the company's fiscal year, therefore the total of four quarterly payments. In principle this figure is easily calculated. The dividend payouts for each quarter are added together and then divided by the total shares outstanding. The numerator is the total dividend payout; the denominator is the number of outstanding shares.

                   Dividends per share = total dividends paid ÷ total shares outstanding.

In practice, the calculation can be a little more complicated. If, for instance, the company has bought back some of its own shares in the second quarter, dividends per share after the buyback will be calculated with a different denominator than the dividend per share calculation prior to the buyback.

In almost all cases, a company's Annual Report reflects all changes in the share numbers during the course of the year and the relevant calculations are explained in the accompanying notes. This being the case, investors infrequently do the calculation themselves. Everything you need to know, whether the total of dividends per share paid for the year or the breakdown by quarter, is already there in the 10-k report -- the more detailed, SEC-required version of a company's annual report. 

Dividends per Share as an Analysis Tool

Investors generally use dividends as a signal. If dividends per share drop, investors may take that as a signal that the company is not doing well financially. Announcement of a larger dividend than anticipated, on the other hand, very often results in an upward spike in the stock price. Unless qualified by other data, however, the dividends per share ratio is not always a reliable or useful analysis tool. For one thing, younger growth companies typically retain earnings at a higher ratio than established companies; it's a very efficient and low-cost way of increasing available funds for expansion, research and acquisition. As of this writing, Amazon, one of the world's largest and most successful technology companies, has never paid a dividend.

Its share price, however, has dependably risen year after year with few exceptions and reflects the company's impressive growth.

To make the dividend per share analysis meaningful, other information related to dividends and earnings, such as the dividend to earnings ratio, should also be taken into account.