Dividend Yield

A dividend yield is defined as a financial ratio that shows how much a company pays out in dividends each year relative to its share price. A dividend yield is the company's annual dividend payments divided by its market cap, or the dividend per share, divided by the price per share. The dividend yield is also known as dividend-price ratio and is often expressed as a percentage. It is the reciprocal is the Price/Dividend ratio.

Dividend yield in finance is actually a way to measure how much cash flow you are getting for each dollar invested in an equity position. This means how much "bang for your buck" would one get from dividends. Dividend yield is useful for investors who require a minimum stream of cash flow from their investment portfolio and can also secure this cash flow by investing in stocks paying relatively high, stable dividend yields.

In order to calculate the dividend yield first the dividend must be determined. The companies usually announce dividends on a quarterly basis, so to determine a price it may be necessary to add them up over the course of a year. Therefore once the annual dividend payment by the company is known it is divided by the stock price. Let us assume that if the annual dividend yield is $10 US Dollars (USD), and the dividend is $1 USD, the yield is 10 percent. Hence when a yield is very high it is very good with very few stocks outperforming it, but stocks can also yield as much as 20 percent in some cases.

Dividend yield is not very essential for the investors as a money-making venture but it may help determine how healthy and profitable the corporation is. It should be noted that a high dividend yield often indicates the company is making substantial earnings per share, but is not the only indicator. Some companies may have stock issued may have a lower yield, but are very healthy.

Questions

• What is a dividend yield?
• How is it calculated?