Dividend Per Share: The Secret to Passive Income Growth

The call came late one Friday evening. It was an old friend, a once skeptical investor who had since turned into a full-blown evangelist for dividend-paying stocks. He had recently realized something: the real wealth is often found in dividend per share (DPS). Not the short-term trades or market-timing strategies, but the slow, deliberate accumulation of wealth through companies that reward shareholders with regular, growing payouts. But how does it work?

Let’s backtrack to a decade ago. Suppose you had invested in a stable, dividend-paying company—think Coca-Cola, Johnson & Johnson, or Procter & Gamble. The stock price may have fluctuated, but one thing remained constant: dividends. These companies pay out a portion of their earnings back to shareholders, known as a dividend, typically in the form of cash per share. This cash payout is measured by dividend per share (DPS), a critical metric to understand whether a company is sharing profits effectively with its shareholders.

In essence, DPS is calculated by dividing the total dividends paid out by the company by the number of outstanding shares. If a company decides to distribute $1 million in dividends and there are 500,000 shares outstanding, the dividend per share is $2. Pretty simple math, right? But the real power of dividends comes with growth and compounding.

Why Dividend Per Share Matters for Investors

There are two key components that make DPS a valuable tool for assessing a company’s potential:

1. Consistency: Companies with a consistent or growing DPS over several years are often considered financially healthy. This signals that the business is generating enough profit to share with its investors and is confident in its future earnings. It can also indicate strong management.
2. Yield: Investors frequently look at a stock’s dividend yield, which is the annual dividend divided by the stock price. For example, if a stock is trading at $100 and its DPS is $4, the yield would be 4%. The higher the yield, the more income you receive relative to your investment.

The Magic of Dividend Growth

Imagine that initial $1,000 investment again. The DPS starts at $2, but with the company’s growth, this increases by 5% every year. After 10 years, the DPS has almost doubled. Not only have you earned consistent cash payouts, but now your stock is worth more, and your yield on the original investment has grown significantly.

This is where the power of compounding dividends comes into play. Investors who reinvest their dividends can buy more shares, which, in turn, generate more dividends. Over time, this leads to exponential growth in your investment without you having to lift a finger. The best part? You’re earning money while you sleep.

Case Study: Coca-Cola

Let’s look at Coca-Cola, a company known for its robust dividend policy. In 2010, Coca-Cola’s DPS was $1.76. Over the next decade, the company continued to raise its dividends each year, reaching $1.68 per share in 2020. This kind of steady growth creates long-term value for shareholders who count on increasing dividends to bolster their portfolios.

From this chart, you can see the gradual growth in dividends, which means steady passive income for those invested. Even during years of slower stock price growth, Coca-Cola kept rewarding its shareholders.

Dividend Aristocrats: The Elite of Dividend-Paying Stocks

Not every company can sustain growing dividends over time. This is why investors often seek out Dividend Aristocrats—companies that have increased their dividends for at least 25 consecutive years. These companies represent the cream of the crop, showing resilience and dedication to shareholder returns through good times and bad.

Some popular Dividend Aristocrats include:

• Johnson & Johnson: Known for its stability in the healthcare sector, this company has been increasing its dividends for over 50 years.
• Procter & Gamble: A giant in the consumer goods space, Procter & Gamble has rewarded shareholders with consistent dividends for over 60 years.
• McDonald’s: Even fast food can be a steady source of income. McDonald's has raised its dividends for over 40 years.

How to Identify High-Quality Dividend Stocks

Investing in dividend-paying stocks is not just about looking at the highest yields. In fact, too high of a yield can be a red flag, indicating that the company might be under stress. Instead, focus on companies that have:

1. A track record of growing dividends.
2. A reasonable payout ratio: This is the percentage of earnings a company pays out in dividends. A lower ratio suggests the company has room to grow the dividend in the future.
3. Strong cash flow: Healthy cash flow ensures that the company can continue paying dividends, even in tougher economic conditions.
4. Sustainable growth prospects: Companies that can reinvest their earnings into the business while also rewarding shareholders tend to be the best long-term investments.

The Risks of Dividend Investing

While dividend investing has clear advantages, it’s not without risks. Some companies, particularly in industries facing significant disruption (think retail or oil), may cut or suspend dividends to conserve cash during tough times. Investors should keep an eye on the company’s debt levels and industry trends to ensure that the dividends will keep flowing.

Final Thoughts: How Dividend Per Share Can Be Your Financial Lifeline

As my friend and I wrapped up our conversation, it became clear: the road to financial freedom often runs through the consistent accumulation of dividend-paying stocks. Dividend per share is not just a number on a spreadsheet; it's a direct reflection of a company’s ability to share its success with investors.

By focusing on long-term growth and compounding dividends, you can slowly but surely build a portfolio that delivers steady, passive income—whether you’re in the market for 10, 20, or 30 years.

The lesson here is simple: the earlier you start, the more time your money has to grow. So, what are you waiting for?