The allocation or distribution of a portion or fraction of the revenues generated by the company to a selected class of shareholders, as unanimously decided by the board of directors, is known as a dividend. Dividends can be issued as cash payments, as shares of stock, or other property.
It is significant to note that the dividends which are declared and paid by a business are not an expenditure of the organization. On the other hand, the dividends are the distribution or sharing and allocation of the earnings of the business or organization. Therefore, it is imperative for the businesses to have a credit balance in Retained Earnings before they pay and allocate the specified dividends to its class of shareholders. But, it must also be taken into account that the business has enough liquidity in form of cash to maintain its day to day requirements.
Dividend Per Share refers to the sum total of all the declared and allotted dividends that can be attributed to every ordinary share allotted. Dividend Per Share or DPS is the total amount of dividends distributed over the course of an entire year (interim dividend exclusive of special dividend) divided by the number of outstanding ordinary shares allotted. The DPS can be calculated by using the below formula:
DPS = (D-SD)/S
D stands for the sum of dividends over a period (this period is usually 1 year)
SD stands for special, one-time dividend, and
S stands for shares outstanding for the period
Let us take an example for understanding the above equation and concept:
ABC company paid a total of $237,000 in dividends over the previous year. For the same year, there was even a special one-time dividend which was totaled up to be $59,250. If ABC Company has 2 million outstanding shares then, calculate the dividend per share for the same.
DPS = (D-SD)/S
According to the formula,
Therefore, DPS = ($237,000-$59,250)/2,000,000
= $0.0889 per share.
The dividend that is paid out additional shares issues to the current shareholders instead of making payment in cash form, then it is known as a ‘Stock dividend’. It is also commonly known as ‘Scrip Dividend’. This is a decision taken by the company to pay the stock dividend to its shareholders when the company’s availability of liquid cash assets is in short supply. These distributions are usually recognized and approved in the form of fractions paid per existing share. For example, if a company issues a stock dividend of 0.05 shares for every single share held by existing shareholders.