Meaning Of Dividend Yield

Meaning Of Dividend Yield

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What Is The Meaning of Dividend Yield –

The meaning of dividend yield is the amount of cash flow you’re getting back for each rupee/dollar you invest in the equity. It is normally expressed as a percentage. The dividend yield is essentially the return on investment for a stock without any capital gains. The dividend yield is a financial ratio that is used to measure the dividend received relative to its market value per share. The dividend yield tells us what you can expect in future income from stock. Dividends simply mean the distribution of profits by a company to its shareholders.

Meaning Of Dividend Yield

Definition of Dividend Yield –

Dividend Yield can be defined as the ratio of annual dividends per share to the price per share of stock. Dividend yield shows how much a company pays out in dividends relative to its stock price. A higher ratio means the company pays high dividends from the profits to the shareholders and a lower ratio means the company pays lower dividends to the shareholders. Dividend yield lets you evaluate which companies pay more in dividends per rupee/dollar you invest, and it may also send a signal about the financial health of a company.

Dividend Yield Formula –

The dividend yield formula is given by

Dividend Yield = Annual Dividends Per Share / Price Per Share

Annual dividends per share mean the total dividend paid per share to the shareholders by the company.

Price per share means the current price of a stock per share.

How Is Dividend Yield Calculated –

The dividend yield is shown as a percentage and calculated by dividing the rupee/dollar value of dividends paid per share in a particular year by the rupee/dollar value of one share of stock. We will discuss the example of dividend yield and we will see how to calculate dividend yield. To analyze the dividend yield after calculating, it should be compared with the sector dividend yield to which the company belongs.

Dividend Yield Example –

Particulars Company ABCCompany XYZ
Annual dividends per share2010
Price per share500100
Dividend Yield (%)4%10%
Amount in Rs

Lets take an above example of company ABC & company XYZ,

Lets talk about the company ABC,

Annual dividends paid by a company per share – 20

Price per share of a company – 500

The formula for dividend yield is

Dividend Yield = Annual Dividends Per Share / Price Per Share

Dividend Yield of Company ABC = 20 / 500

Dividend Yield of Company ABC = 4%

Lets talk about the company XYZ,

Annual dividends paid by a company per share – 10

Price per share of a company – 100

The formula for dividend yield is

Dividend Yield = Annual Dividends Per Share / Price Per Share

Dividend Yield of Company XYZ = 10 / 100

Dividend Yield of Company XYZ = 10%

From the above example, we can conclude that the dividend yield of company XYZ is greater than company ABC which means company XYZ is giving more dividends relative to its stock price than company ABC.

Dividend Yield simply means how much percentage of the stock price the company gives the dividend.

How To Use Dividend Yield For Stock Analysis –

  1. Dividends simply mean the distribution of profits by a company to its shareholders.
  2. High dividend yield stocks pay higher dividends than the fair market value of the stock.
  3. Low dividend yield stocks pay lower dividends compared to the fair market value of the stock.
  4. Dividend-Paying stocks are considered to be stable.
  5. Dividend-paying stocks are resilient to market crash.
  6. Too-High dividend yield stocks are risky.
  7. Consistency dividend-providing companies are considered to be mature.
  8. Value Investors prefer dividend-paying stocks.
  9. Increasing Dividend Yields Indicate strong financial health of a company.

Also, Check – Important Financial Statements

Check the article on Investopedia about Dividend Yield Definition

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