Dividend Definitions - Dividend Terminology Explained
Dividends represent a portion of a company’s profits distributed to its shareholders, usually in cash but sometimes in shares. Understanding dividend terms helps investors evaluate income potential, dividend sustainability, and timing. This page provides definitions, formulas, and context for the most important dividend-related concepts.
Quick Reference Summary
| Term | Definition | Formula |
|---|---|---|
| Dividend Per Share (DPS) | Total dividends paid divided by the number of ordinary shares in issue. | DPS = Total Dividends ÷ Number of Shares |
| Dividend Yield | Annual dividend expressed as a percentage of the current share price. | Dividend Yield = (DPS ÷ Share Price) × 100 |
| Dividend Cover | How many times the company’s profits can cover the dividend. | Dividend Cover = EPS ÷ DPS |
| Payout Ratio | Percentage of earnings distributed as dividends to shareholders. | Payout Ratio = (DPS ÷ EPS) × 100 |
| Ex-Dividend Date | Date when shares start trading without the right to receive the next declared dividend. | - |
| Record Date | Date on which shareholders must appear on the company’s register to receive the dividend. | - |
| Payment Date | Date the dividend is actually paid to shareholders. | - |
Dividend Per Share (DPS)
Dividend Per Share represents the total dividend amount declared by a company for ordinary shareholders, divided by the number of ordinary shares in issue. It shows how much dividend each share receives.
Formula: DPS = Total Dividends Paid ÷ Number of Ordinary Shares
If a company pays dividends more than once per year (for example, quarterly), the annual DPS equals the sum of all dividend payments for that financial year - such as interim and final dividends.
Dividend Yield
Dividend Yield measures the annual dividend income relative to the current share price. It indicates the return an investor would earn in dividends if they bought the stock today.
Formula: Dividend Yield = (Dividend Per Share ÷ Current Share Price) × 100
Example: If the dividend per share is 4p and the share price is 100p,
the yield is (4 ÷ 100) × 100 = 4%. On a £1,000 investment, that equals £40 in dividends
over a year (before tax).
Try It Yourself: Dividend Yield Calculator
Dividend Cover
Dividend Cover indicates how many times the company could pay its current dividend from its after-tax profits. It helps assess the sustainability of dividend payments.
Formula: Dividend Cover = Earnings Per Share ÷ Dividend Per Share
A higher cover (e.g., 2 or more) suggests a well-supported dividend. A low cover (close to 1 or below) may signal that the payout is stretched and at risk of reduction. Growth companies often maintain higher cover ratios, while mature firms may operate with lower ones.
Explore Dividend Cover & Payout Ratio
Payout Ratio
The Payout Ratio shows what proportion of a company’s earnings is paid out as dividends. It’s effectively the inverse of dividend cover.
Formula: Payout Ratio = (Dividend Per Share ÷ Earnings Per Share) × 100
A payout ratio between 40% and 60% is often seen as sustainable, although norms differ by sector. Very high payout ratios may indicate limited reinvestment in growth, while very low ratios may indicate a focus on expansion or debt reduction.
Ex-Dividend Date
The Ex-Dividend Date (often abbreviated “ex-div date”) is the day a share begins trading without the entitlement to the upcoming dividend. If you buy shares on or after this date, you will not receive the next dividend payment.
To qualify, an investor must purchase the shares before the ex-dividend date.
Record Date
The Record Date is the date the company uses to determine which shareholders are eligible to receive the dividend. Only those listed on the register by the record date will be paid.
Because trades typically settle one business day after execution, the record date usually falls one business day after the ex-dividend date.
Payment Date
The Payment Date is when the dividend is actually distributed to shareholders. On this date, dividends are typically credited automatically to shareholders’ brokerage or bank accounts.
Final Notes
Understanding dividend terminology helps investors make informed decisions about income stocks. While a high yield can appear attractive, it’s equally important to consider dividend cover, payout ratio, and company profitability to assess whether the dividend level is sustainable over the long term.