Definition:

Dividends Per Share (DPS) is a financial metric that indicates the amount of cash a company returns to its shareholders for each share of stock they own, typically on an annual basis.

Formula:

DPS = Total Dividends Paid / Number of Outstanding Shares

How to use the metric:

Investors use DPS to assess the income-generating potential of an investment in a company's stock. A higher DPS can indicate a company's strong financial health and its commitment to returning profits to shareholders. It is often used in conjunction with other metrics to evaluate a company's overall financial performance and attractiveness as an investment.

Limitations:

DPS does not account for stock price changes or capital gains, which can also significantly impact an investor's total return. It may not reflect a company's future dividend-paying ability, especially if dividends are funded by debt or one-time profits. Additionally, DPS does not provide insights into the sustainability of dividend payments.

Applies to:

DPS is most applicable to industries with established companies that have stable cash flows and a history of paying dividends, such as utilities, consumer goods, and financial services.

Doesn't apply to:

DPS is less relevant for industries characterized by high growth and reinvestment needs, such as technology and biotech, where companies may prioritize reinvesting profits over paying dividends to fuel growth and innovation.

Summary:

Dividends Per Share (DPS) is a key metric for evaluating the income potential of an investment in a company's stock, reflecting the amount of cash returned to shareholders per share. While useful for assessing dividend-paying companies, it has limitations and is less applicable to high-growth industries where dividends are not a primary focus.