Dividend per share allows investors in a business to determine how much dividend income they will receive per share of their common stock. Dividends are the portion of profit that a company distributes to its investors. Many investors, such as dividend investors, enjoy investing in dividend-paying stocks, which provide a stream of current income. Investors who are more interested in the growth of a company’s stock price prefer to invest in companies who retain most or all of their earnings. Consider working with a financial advisor to make sure your investment portfolio is giving you an adequate income stream.

What Is Dividend Per Share?

Dividend per share is used to measure the amount of cash distributed to equity investors per share of its outstanding stock. This cash is the dividend declared by the company for its qualified investors. In order to receive dividends, you must invest in the company before its ex-dividend date.

By calculating dividend per share, investors know how much of the dividend is attributable to each share of stock outstanding. They can use that information to determine how much dividend income they will earn annually from a company. An investor who owns 500 shares of stock would receive more dividend income than an investor who owns 100 shares of the stock. However, they would both have the same dividend per share. Here’s an example if the dividend per share is $0.50:

Investor with 500 shares: 500 x $0.50 = $250 Dividend Income

Investor with 100 shares: 100 x $0.50 = $50 Dividend Income

Mutual funds and exchange-traded funds also pay dividends to their investors. They are distributed from the pool of dividends paid to them by the securities in the funds.

Calculation of Dividend Per Share

There are two methods you can use to calculate dividend per share. The method you use depends on the information you have readily available.

Dividend Method

The simplest and most straightforward method uses the traditional dividend per share formula. Here is an example:

Dividends Paid = $3,000,000

Shares Outstanding = 10,000,000

Dividend Per Share = Dividends Paid/Shares Outstanding = $3,000,000/10,000,000 = $0.30

EPS Method

The earnings per share (EPS) method requires that you know the company’s net income and that you use it to calculate EPS and the dividend payout ratio first. Here is an example:

Net Income = $10,000,000

EPS = Net Income/Shares Outstanding = $10,000,000/10,000,000 = $1/share

Dividend Payout Ratio = Dividends Paid/Net Income = $3,000,000/$10,000,000 = $0.30

Dividend Per Share = EPS x Dividend Payout Ratio = $1.00 x .30 = $0.30

The dividend per share should be the same regardless of which of these two methods you use.

If a company has paid a special, or interim, dividend, it is not usually included in this calculation. A special dividend could be paid by a firm if it earned unusually high profits and wanted to share those with its shareholders. It is not usually included in the dividend per share calculation since it is a one-time payment.

Dividend Per Share for Investors and the Company

Dividend per share is valuable to both investors and the company. Calculating dividend per share for a period of time indicates how profitable and stable a company has been in the past. Quarterly dividend per share data allows investors to forecast what a company’s dividends might be in the future. For the company, calculating dividend per share in the present allows management to see trends in the company’s financial performance.

Dividend-paying companies tend to be mature companies. If a company is a growing firm, it is more likely to retain a higher percentage of its earnings. Such a company’s stock price indicates its growth or capital appreciation.

If a company has the same dividend over a period of time, or a growing dividend, it is viewed by many investors to be a strong, dependable firm. Investors tend to like to invest in a company that pays stable dividends. Companies with growing dividends send a positive signal to investors. A growing dividend usually means that firm management thinks it can sustain its earnings growth in the long run.

If a company lowers or stops its dividend, investors may take that as a signal that the firm is in trouble. That is not necessarily the case but further investigation is warranted. The firm may have found new growth opportunities. It may be using cash to pay down debt instead of paying dividends, at least in the short-term. A declining dividend per share may also mean that investors will sell their stock in the company which will drive down the stock price. A company’s dividend per share is very important to its financial stability although not all companies pay dividends.

Companies also pay dividends on preferred stock. Those dividends are paid prior to the determination of the dividend for common shareholders and may reduce dividend per share on common stock.

The Bottom Line

Dividend per share is both a simple and powerful financial ratio to use in assessing firm performance. It can be used by both investors and company management. By calculating dividend per share, investors can determine how much dividend income they will receive annually. It helps investors engage in tax planning regarding their dividend income as well as fine tuning their investment strategy. Investors can also use the quarterly dividend per share data to forecast possible future dividends. Just keep in mind that trends in dividend per share are more important than any one quarter or even year of dividend data.

Tips on Investing

• If you’re not sure how to adjust your portfolio to increase dividend income, financial advisors can walk your through the process. The SmartAsset financial advisor matching tool will pair you with as many as three local financial advisors to help you out. Spend some time answering our questionnaire as accurately as possible so that all matches are truly your best options. If you’re ready, get started now.

• Whether you’re investing in dividend stocks or not, or whether you need to calculate dividend yield or not, you need to know that you can’t avoid risk altogether. Don’t be reckless, but don’t be so safe you compromise even prudent returns.

Photo credit: ©iStock.com/Anastasiia Yanishevska, ©iStock.com/Everyday better to do everything you love, ©iStock.com/FG Trade

The post How Dividend Per Share Is Calculated appeared first on SmartAsset Blog.