How to Calculate Growth Ratio Using Dividends Per Share

by C. Taylor

Dividends are a way of distributing profits back to shareholders. The amount distributed should ideally increase from year to year. Increases in dividends per share are a positive sign that the company's managers feel it will maintain growth and be able to continue dividend payouts. Conversely, decreases in dividends indicate the managers' lack of confidence. The increase in dividend payout is expressed as a growth ratio, which states how much the payout grew with respect to the previous year. Growth ratios in excess of 5 percent are a good sign.

1. Talk to your stock broker and get the stock's current dividends per share and that of an earlier year. To calculate the 1-year growth, you will want the previous year, but you can calculate this growth from any number of years in the past.

2. Subtract the previous dividends per share from the current dividends per share. As an example, if the stock currently offers $2.25 per share in dividends, but last year it paid $2.00 per share, then the payout increased by $0.25 per share.

3. Divide this figure by the previous dividends per share to calculate the growth ratio. In the example, $0.25 divided by $2.00 gives you a growth ratio of 0.125, or 12.5 percent, which is a very positive sign.

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