Dividend yield is the amount that a company pays to its share holders annually for their investments. It is expressed as a percentage and indicates attractiveness of investing in a company’s stocks. Dividend yield is considered as ROI for income investors who are not interested in capital gains or long-term earnings. It is calculated as “Annual Dividend Per Share” divided by “Current Market Value Per Share”.
Dividend Yield Ratio = Dividend per Share / Market Value per Share
An example will help understanding Dividend Yield. If a company pays $2 as annual dividend and its shares are currently trading at $70/share. The dividend yield would be 2.9% ($2/$70 * 100).
Dividend yield indicates how much you are earning for each dollar invested in a company. Investors widely use this ratio in trend analysis and consider their past dividend yield ratios to decide whether to invest in the company or not. Dividend yield is most important for the investors who are seeking long term investments and a consistent return every year. Old companies have been observed consistent in paying dividends with a very small or no variation. Investment in such companies’ shares is relatively secure and less risky and their pay out ratio is also high as compare to new companies. It also helps in making a comparison of other investments, such as, deposits, debentures, certificates, Govt. securities etc.
Norms and Limits
Market value of shares affect dividend yield ratio. Owners/Directors of the company may leak out some fake information to play with the market value of shares. Once the market value of share fluctuates, dividend yield ratio gets adjusted accordingly.Dividend yield ratio is useless for companies that do not pay dividends to share holders. This may include a group that has several technology stocks etc.