Dividend yield is a financial ratio that indicates the percentage return a company pays out in dividends relative to its share price. It is a measure of how much cash flow investors receive for each rupee invested in a company's stock.
Formula for Dividend Yield:
Dividend Yield is calculated using the following formula:
Dividend Yield = (Annual Dividend per Share) ÷ (Market Price per Share)* 100
Where:
- Annual Dividend per Share: Total dividends paid out to shareholders over the past year divided by the total number of outstanding shares.
- Market Price per Share: Current trading price of the company's stock in the market.
Example:
Suppose a company paid total dividends of ₹5 per share over the past year, and its current stock price is ₹100 per share.
Dividend Yield = (₹5) / (₹100) * 100 = 5%
This means the company's dividend yield is 5%, indicating that for every ₹100 invested in the company's stock, the investor receives ₹5 in dividends annually.
Importance of Dividend Yield:
1. Income Generation: Dividend yield is important for income-seeking investors who rely on regular cash flow from their investments.
2. Comparison Tool: It helps investors compare the income potential of different stocks within the same industry or across sectors.
3. Indicator of Financial Health: A stable or increasing dividend yield may indicate financial stability and confidence from the company's management in its future earnings prospects.
4. Market Valuation: Dividend yield can also influence stock valuation. Higher dividend yields relative to other stocks may attract investors seeking income, potentially affecting stock price movements.
Considerations:
- Dividend Policy: Companies may choose to distribute dividends based on their earnings and financial policies. A consistent or increasing dividend yield can signal financial health and shareholder-friendly policies.
- Yield Variation: Dividend yields can vary over time based on changes in the company's earnings, dividend payouts, and stock price fluctuations.
- Risk: A very high dividend yield may sometimes indicate financial distress or unsustainable dividend payouts if not supported by underlying earnings.
In summary, dividend yield is a key metric for investors interested in income generation from their investments. It provides a straightforward measure of the return on investment through dividends relative to the current market price of a company's stock.