A:

The term dividends per share (DPS) refers to the total dividend a company pays out over a 12-month period, divided by the total number of outstanding shares. A company uses this calculation to share profits with its shareholders. DPS can indicate how profitable a company is over a fiscal period.

DPS can tell an investor about the company's past financial health and its current financial stability. For example, suppose company ABC had a DPS of 60 cents last year, but this year, it doesn't pay a dividend to its shareholders. This can signal to investors the company may be in poor financial health and cannot withstand the current market conditions. A decrease in DPS can cause investors to sell their stake in the company, thus driving the market value of ABC down.

However, a decrease in dividend per share does not always signal a company is not financially stable. For example, suppose ABC did not pay out a dividend to its shareholders because it is using its profit to reinvest into the company to create a new product. This reinvestment into the business can potentially produce higher dividends in the long term.

Suppose company YXZ has been paying a steady dividend of 90 cents per share. The next year, company YXZ raises its dividend to $1.10 per share. This signals the company is financially stable and performing well in its current market condition. An increase in DPS also signals the management team is confident in the company's future profits.

(For related reading, see "What Is the Difference Between Earnings per Share and Dividends per Share?")

RELATED FAQS
  1. What is the difference between earnings per share and dividends per share?

    Learn what earnings per share and dividends per share are, how the two ratios are calculated, and the main difference between ... Read Answer >>
  2. What is the difference between yield and dividend?

    Learn how to differentiate between dividend yield and dividend return, and see why dividend yield is the more popular rate ... Read Answer >>
  3. Cash Dividends or Stock Dividends: Which is better?

    The purpose of dividends is to return wealth back to the shareholders of a company. There are two types of dividends: cash ... Read Answer >>
Related Articles
  1. Investing

    Is Dividend Investing a Good Strategy?

    Understanding dividends and how they generate steady income for shareholders will help you become a more informed and successful investor.
  2. Investing

    The 3 Biggest Misconceptions of Dividend Stocks

    Learn about three dividend stock misconceptions and how to avoid them for greater gains.
  3. Managing Wealth

    An Example of Dividends in Arrears

    Learn about the concept of dividends in arrears and which shares of stock guarantee payment of accrued dividends even if the company doesn't turn a profit.
  4. Investing

    How And Why Do Companies Pay Dividends?

    If a company decides to pay dividends, it will choose one of three approaches: residual, stability or hybrid policies. Which a company chooses can determine how profitable its dividend payments ...
  5. Investing

    AAPL: Apple Dividend Analysis

    Apple's dividend has had healthy growth ever since its 2012 reinstatement, thanks to Apple's continuously rising revenue, earnings and operating cash flow.
  6. Investing

    Two Reasons Dividends Will Drive Returns in 2016

    Dividend paying stocks are expected to be in vogue this year. But investors have to be choosy when picking one to invest in.
  7. Investing

    How dividends affect stockholder equity

    Find out how dividends affect a company's stockholder equity and how the accounting process changes based on the type of dividend issued.
  8. Investing

    The Best Dividend Paying Stocks in Energy

    Investors need to look beyond dividend yield to find stocks that will help generate a stable dividend income.
RELATED TERMS
  1. Dividend

    A dividend is a distribution of a portion of a company's earnings, ...
  2. Cash Dividend

    Cash dividend is the money paid to stockholders normally as a ...
  3. Dividend Signaling

    Dividend signaling suggests that a company announcement of an ...
  4. Cash-and-Stock Dividend

    A cash-and-stock dividend contains a portion of cash and a portion ...
  5. Incremental Dividend

    An incremental dividend is a series of regular increases to a ...
  6. Accelerated Dividend

    An accelerated dividend is a special dividend that a company ...
Trading Center