Dividend payments are allocated on a per-share basis. The company issuing them may announce the dividend in terms of the dollar value, but investors and analytical services will translate that into a percentage yield.
When calculating the dividend from a company perspective, the total dividend amount that they are comfortable declaring is divided by the number of outstanding shares. The dividend per share is an important number, and the growth of this number is the dividend growth rate.
Simply put, the dividend per share is the total amount of the current year’s dividend distribution divided by the number of outstanding shares. Not all investors are looking for dividends, but when you consider automatically reinvested dividends (sometimes called a DRIP), and you compound them with the appreciation of the stock, many dividend stocks will look pretty good.
Of course, you have the downside of taxation on dividend distributions if you aren’t holding the stock in a tax-deferred account. Investors might use dividends as another metric by which to evaluate their prospective holdings, and there are a few types of commonly-used calculations for dividends that can help investors get a clearer picture.
Companies use dividends partially as a sign to the market that they have healthy earnings. Even companies that are struggling will sometimes seek to maintain their dividend per share, because if investors are given the warning that a dividend is shrinking, they may start to take a closer look at the company or just bail out in favor of a stock with a better-looking dividend.
High dividends can help a stock maintain and appreciate in value, which gives the company that issued it increased value to use in employee stock options, mergers and acquisitions, and so on.
If a company declares irregular “special dividends,” it is normally appropriate to disregard this amount from the dividends per share calculation if it does not occur annually.
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