What is Dividend Yield Ratio?
Dividend yield indicates the percentage return the investor will earn through the dividends received from his/her investments in a company’s shares at the prevailing market price.
The relationship between dividends and the market price of company’s shares is expressed by a ratio called ‘Dividend Yield Ratio’.
How is it calculated?
It is calculated by dividing the per share divided by the current market price of the stock
For example: Suppose your investor invested Rs. 2000 in buying 100 shares of ABC Ltd company at Rs. 20 per share with a face value of Rs. 10 each. The company declares a dividend of 20 per cent i.e. Rs. 2 per share, then you investor will get a total dividend of Rs. 200.
Dividend Yield is 2 / 20*100 = 10 per cent and this figure indicates the actual yield on the dividend.
What does dividend yield signify to the investors?
Many investors have a preference for higher dividend yield. High dividend ratio may mean the stock is under priced. To others, it may indicate that the company has been hit hard in times of economic depression and financial hardship and that the future dividends might not be as high as earlier dividends.
Let’s take one example:
Company A and Company B both pays a dividend of Rs.1 per share. The current stock price for Company A is Rs.50 and for Company B it is Rs. 25. It is common to believe that the two stocks are equivalent since they both pay the same amount in dividends per share. The dividend yield for Company A is Rs.1 / Rs. 50 = 2%. The dividend yield for Company B is Rs 1/ Rs 25 = 4%. Company B pays a larger dividend relatively.
What kind of investors prefer dividend yield more as compared to other valuation ratios?
Investors looking for periodic income prefer using the current yield of a stock to narrow down investment options. Calculating the yield can provide useful information on just how much is paid out in dividends by a company compared to its share price.