Dividend yield is used to calculate the return one may get by investing in various stocks. It must be noted that people put money in stocks to earn money and the maximum, one may generate out of one’s investment, the more lucrative the investment option is.
Dividend yield is the ratio or the percentage of the amount of dividend paid annually to the current market value of the stock.
Example of Dividend Yield
Let’s consider an example, suppose for Company-ABC and Company-XYZ are paying Rs.10 dividend per share.
On market research we find that stocks of ABC company are trading at Rs.200 per share while that of XYZ company is available for RS. 100 per share.
Dividend Yield of ABC = (10 ÷ 200) X 100 = 5%
Dividend Yield of XYZ = (10 ÷ 100) X 100 = 10%
So, if we don’t consider any other factors, any investor will invest in shares of company XYZ, as the income earned through dividend yields out of investing in XYZ is twice that of investing in ABC.
Comprehensive View
But, if we take a comprehensive view, we should understand that if a company is paying higher amounts of dividend, it is not keeping aside much for expansion, modernization, debt repayment, etc.
So, while selecting a stock for investment purposes, one must take every factor into consideration and not take a myopic view on any one parameter.
Recommended Read :
- What are Financial Statements?
- What is a Balance Sheet?
- Financial Statement of a Company 6 Important Points
- What is a Financial Ratio?
- What is Meant By Financial Health of a Company?
- What are Company Earnings?
- What is Working Capital?
- Calculate Working Capital
- What is Earnings Per Share?
- What are Cash Reserves?
- What is Break Even Point of a Company?
- What are Current Liabilities?
- What are Long Term Liabilities?
- What is Debt to Equity Ratio?
- What is Dividend Payout Ratio?
- What is Dividend Yield?
- What is Meant By Liquidity of Funds?
