Dividends per share are the dividends paid for each outstanding share for a particular period. Good dividends per share have the potential to attract customers to buy shares in the company. A good dividend indicates secure income for the investor because the company has a stable income. In addition, dividends often are correlated with a strong performance and better prospects of the business.
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Estimating the dividend per share tells an investor the income that they can expect for a share investment. A consistent improvement in dividend per share weaves a resilient growth story for any company.
The formula for estimating dividend per share is as follows-
In the above formula, special dividends are declared as a one-off case and may or may not be repeated in the future. Interim dividends are a part of special dividends. Interim dividends are declared and paid to the shareholders before the annual earnings have been estimated.
Let us take an example to understand the estimations. Suppose DJ limited paid US$ 100000 as dividends during 2020. There was also a special dividend of US$ 25000 during the year. DJ Limited has 50000 outstanding shares during the period. The dividend per share will thus be as follows
The dividend per share of DJ limited for the year 2020 will be US$ 3.75
Usually, dividends are paid in cash. Other forms of dividends may be property dividends, stock dividends, scrip dividends, and liquidating dividends. The various forms in which investors can receive dividends are as follows-
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Cash dividends may be given to investors in the form of special, final, or interim dividends. Special dividends are a one-off case and are often a result of windfall gains made by a company due to any event. Interim dividends are those dividends declared before the income or profit for that financial year is estimated. As the name suggests, final dividends are declared after the accounts for the respective financial year are closed, and the final net profit is known.
High and frequent dividend distributions may mean lower retained earnings. Retained earnings are essential for any company to reinvest and expand their business. However, if strong retained earnings accompany dividend payouts, the company may be considered financially very strong and resilient.
Also, suppose there is a company that regularly pays good dividends. A very attractive investment opportunity comes it's way, and the opportunity cost of chasing it is dividend payment. It may be a one-time irregularity in dividends or a path being paved for regular dividends in such a case. Investors may end up judging the reduced dividends or non-payments as poor performance. Such wrong signals may be detrimental to the market value of the company.
Earnings per share and dividends per share are both indicators of a company's profits. But they are different ratios. Earnings per share assess the profit per share, while dividend per share is part of the profit paid out to investors for each share they hold.
Earnings per share are estimated as follows-
While dividends per share is estimated as follows-