Understanding Dividend Yield

A Dividend Yield is a financial ratio that measures the dividend paid by the company relative to stock price, and it is generally expressed as a percentage, which gives an estimation of the dividend's return on investment. In other words, the dividend yield formula computes the percentage of a company's market price per share that is paid to shareholders as dividends. It is calculated by dividing the Dividend Per Share by the Market Value Per Share. Investors who are looking for fixed income in the stock market look at dividend yield.

The formula to derive Dividend Yield Ratio

Current Price - It is the most recent selling price of stocks. The current price indicates the current value of the stocks, and it is also known as market value.

Dividend Per Share - DPS or Dividend Per Share, is the amount that a company declares as a dividend for every ordinary or equity shareholder. Dividend Per Share is computed by dividing the total dividend paid by the company, including interim dividends, over a period of time (usually a year) by the total number of outstanding shares.

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Key Highlights

Small companies are less likely to pay dividends than mature companies because they reinvest in their business for growth and expansion.

Investors should not solely depend on one ratio while analysing the company. Because dividend data may be outdated or based on incorrect information.

Consistent growth in dividend yield of the particular company over a period is more important than a high or low ratio. With this, the stock price should be growing.

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While looking at the Dividend Yeild Ratio, the following points should also take into consideration:

Every share has a face value and a market value. Market Value refers to the current trading price of a company's shares. The current price fluctuates constantly due to supply and demand for that stock. Every company also has a nominal value, which is known as Face Value.

Small companies are less likely to pay dividends than mature companies because they reinvest in their business for growth and expansion.

The decisions regarding dividend payments are made by the company's board of directors. The company is under no obligation to pay dividends to shareholders. Even if a company consistently pays dividends, this does not guarantee that it will continue to do so in the future. The decision to pay a dividend is entirely up to the company's board of directors.

While analysing the dividend yield ratio, consider why the dividend is higher or lower than the previous dividend. It could be due to an increase or decrease in stock price, or the company is genuinely paying a higher dividend compared to previous year.

When evaluating a company that appears distressed and has a higher-than-average dividend yield, investors should proceed with caution. Because the denominator of the dividend yield equation is the stock price, a strong downtrend can dramatically increase the quotient of the calculation.

Investors should not solely depend on one ratio while analysing the company. Because dividend data may be outdated or based on incorrect information. Many companies have a very high dividend yield as the stock price falls. If a company's stock falls sufficiently, the amount of its dividend may be reduced or eliminated entirely. To reduce the risks, along with dividend yield, we must look at other financial ratios and fields.

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How to use Dividend Payout Ratio effectively

In general, investors seeking fixed income in the stock market look for companies that pay consistent dividends every year that should be greater than 3%.

Consistent growth in Dividend Yeild of the particular company over a period is more important than a high or low ratio. With this, the stock price should be growing.

Always keep in mind that paying out large dividends can reduce a company's ability to grow. Every rupee that the company pays out in dividends to its shareholders is money that the company does not reinvest in itself to generate more capital gain.

Dividend yield only tells us how much a company gives a dividend in the form of a percentage. But it does not represent how profitable the company is, so we cannot look at only the dividend yield before investing. To check the financial performance of the company, we must consider other factors that show the company's financial condition, such as ROIC, ROE, net margin, Income Statement which shows Operating Profit, Net Profit, EBITDA, etc. With this, you can also check the TSR Stock Index to know the technical as well as financial strengths of the company.

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