DIVIDEND YIELD

Dividend is nothing but a portion of the profit shared by the organization with its share holders. Dividend is calculated for each share, and is divided to its shareholder based on the number of shares the shareholder holds.

Dividend yield is nothing but the ratio of the annual dividend given by the company to the market price of the share of the company. Dividend yield can also be termed as the percentage of cash that the investor gets back for holding the stock at the current market price.

Dividend yield= Dividend per share/ Market price of the share

Dividend yield can be used to find out whether the stock is over priced or under priced. When the Dividend yield is less it is assumed that the stock is over priced, and it might not suit the investor for investment on long term basis. Whereas if the dividend yield is more then the stock is assumed to be under priced, and it might suit investor to invest in those kind stock on a long term basis. However while making investment decision dividend yield must not be the only factor based on which decision should be made, this is because dividend takes only dividend and market price of the share as a factor. The dividend given by the organization depends on whole lot of factor. Dividend yield is useful mostly in ideal conditions.

There might be problem in the calculation of dividend yield in some situations as mentioned below.

• What will happen if the dividend is not given at the particular year, if that is the case then dividend yield cannot be calculated for that particular year.

The most important factor that must be considered when making investment decisions based on dividend yield is pay out ratio. Pay out ratio is the portion of the profit that is given as dividend. Payout ratio should not be high, because if the payout ratio is too high it means that the organization is not going to make any further investment on new project or else not involved in any expansion mode. The two factor mentioned before is not good for organization on long run basis.