Money has always been a scarce resource for everybody. This is so, because may be for a middle class family five lakhs is not sufficient, whereas for a rich affluent family a crore may be much less. Therefore, money being a scarce resource, everybody wants to generate a lot of money from less of investments. In other words, people always seek for high profits, lesser investments which is defined as yield. But people often get confused between earnings per share, dividend payout ratio, dividend and dividend yield. Apart from this, they also look for clear-cut idea about high yielding stocks so that they can probably invest in these stocks. In this article, I will strive to resolve this confusion by explaining the various terms to you related to dividend and investing.
Earning Per Share (EPS)
Earnings are made available to equity shareholders after interest, taxes and preference dividend are paid from profits. It measures the profit available to equity shareholders.
EPS = Net Profit after Interest, Tax and Preference Dividend/ Number of Equity Shares
For example, a company has 2, 00,000 ordinary shares and equity earnings for the company stands at Rs. 8, 00,000, EPS would be Rs. 4 per share (8, 00,000/ 2, 00,000).
Higher the EPS, the better it is as high EPS leads to enhancement in the market price of equity shares.
Dividend Per Share (DPS)
Generally, companies do not distribute whole of the earnings available to equity shareholders. It is the tendency of companies to declare a part of earnings as dividend which is actually payable to ordinary shareholders and retain the balance in the form of retained earnings. Dividend per share is the amount of dividend declared per equity share.
DPS = Dividend Paid to Equity Shareholders/ Number of Equity Shareholders
Dividend Payout Ratio (DP)
This ratio brings to focus the extent of the earnings available to equity shareholders that are actually distributed to them as dividend.
DP = Dividend Per Share/ Earnings Per Share
For example, the dividend payout ratio of the company is 40%, i.e. retention ratio will be 60%. Therefore, if the EPS is Rs. 4, then the dividend per share will be Rs. 1.60 (Rs. 4 * 40%) and the company will retain balance Rs. 3.40 for future investments.
A high dividend payout ratio indicates that the business entity follows a liberal policy of declaring dividends.
Dividend Yield Ratio
It expresses the relationship between dividend declared by the company per equity share and the amount invested by the equity shareholders on one share.
Dividend Yield Ratio = (Dividend Per Share/ Market Price of Equity Share)* 100
When a company says that it has declared 10% dividend, then the dividend is declared on the face value of the share. Let us say, you have 100 shares of XYZ Co. whose market price is Rs. 1,200 with face value of Rs. 10. The company has declared Rs. 40 dividend per share. So, your dividend income will be Rs. 4,000 (100 shares * Rs. 40). And the dividend yield ratio will be 3.34% [(40/ 1200)* 100].
Therefore, one should not get impulsive for purchasing a stock just by looking at the dividend per share. By virtue of being a better indicator, dividend yield ratio matters most rather than the dividend percentage.
Advantages of Better Dividend Yielding Stocks
1) The market price of high dividend yielding stocks tends to grow over time, thus giving a high capital return.
2) High dividend yield will automatically mean a high rate of dividend, therefore a high current return. High capital return and high current return, both will add to your wealth.
3) Dividends from equity shares are tax free in the hands of shareholders.
How to Select Good Dividend Paying Stocks?
The best way to do this is keep an eye on the values of the stick and the declarations from the company. Don’t just calculate the EPS and DPS and jump to conclusions, rather look for the detailed information.
Keep investing and keep getting higher profits.