What is Dividend Yield and Dividend Yield Formula – Dividend Yield or Dividend Ratio is a financial ratio that compares the amount of cash dividends distributed to shareholders with share prices.
Dividend Yield is expressed as a percentage (%) and is an investment attraction against shares in a company.
Dividend Yield is used by investors to show how their investment generates cash flow in the form of dividends or increases in asset value by stock appreciation.
Dividend Yield shows how much income can be generated by each dollar invested in a company’s shares. Generally, investors will use this Dividend Yield ratio before making an investment decision.
Dividend Yield or Investment Results can be considered as ROI (Return of Investment) for the income of investors who are not interested in the Capital Gain of a stock. This ratio is very important for investors who prioritize long-term investments and returns that are consistent each year.
Yield Dividend Formula (Investment Return)
Divident Yield is calculated by dividing the Dividend per Annual Share ( Dividend per Share ) with the Market Value per Share at that time. The following is the Yield Dividend Formula.
Dividend Yield = (Dividend per Share / Market Value per Share) x 100
Example of Calculating Dividend Yield
As of November 6, 2016, the price per share of ABCD Bank is traded at $ 6, -, while the Annual Dividend per Share distributed in 2016 is $ 1. What Is the Dividend Yield of ABCD Bank?
- Dividends per Annual Share = $1 (Cum Date March 22, 2016).
- Price per Share = $ 6, – (closing price on November 6, 2017).
- dividend yield = ??
- Dividend Yield = (Dividend per Annual Share / Market Value per Share) x 100.
- Dividend Yield = ($ 1 / $ 6) x 100.
- Dividend Yield = 16,6%.
So Yield Dividend of ABCD Bank is 16,6%.
Note: Please note that this Dividend Yield will change along with the movement of stock prices in the stock trading market.
Analysis and Assessment
Investors use this Dividend Yield formula to calculate the cash they get from their investment in shares. In other words, Investors want to find out how much dividend they will get on each dollar they invest.
A high dividend yield means a company pays a large dividend to its investors. Thus, Investors get higher compensation for their investments when compared to companies that produce low Yield Dividends. Basically, all investors want the highest dividend yield possible.
As mentioned earlier, every investor who invests his money in shares is to get a return both with Dividends or with Capital Gain (increase or appreciation of shares).
But in the case of providing Dividends, each company has its own policies. There are several companies that choose to pay dividends regularly to attract investors. This type of stock is usually referred to as Income Stocks.
But there are also companies that choose not to provide dividends but reinvest their money into the business. These types of stocks are usually called Growth Stocks.
Please to also read Profitability Ratios Definition and Types.