What Is Dividend Yield Formula?
A dividend yield formula is the expression that helps derivethe ratio of dividends paid out by the company to its investors per the current market price of the company’s share. It is one of the most important metrics in deciding whether an investment into the share will result in the expected returns.
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Source: Dividend Yield Formula (wallstreetmojo.com)
Investors must know how much they are likely to receive as returns compared to the price they pay for each share. Calculating the stock dividend yield helps investors figure out how much return they will get back.
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Key Takeaways
- The dividend yield formula is one of the essential metrics to assess the outcome of an investment.
- It helps determine the return investors can expect after putting their hard-earned money to use.
- However, other than the return, an investor also needs to look at the financial statements, goodwill of the company, growth prospects, etc.
- The dividend yield is a simple calculation that any newcomer to the market can also gauge using the correct tools.
Dividend Yield Formula Explained
The dividend yield formula is calculated by dividing the annual dividends per share by the price per share. It helps companies know what exactly they need to pay to investors and lets the investors predict how much they are likely to receive as a return on their investment. This, in turn, makes it easier for them to decide whether to proceed with the investment.
Let’s take a simple example to illustrate how this dividend yieldDividend YieldDividend yield ratio is the ratio of a company's current dividend to its current share price. It represents the potential return on investment for a given stock.read more concept works.
Let’s say that X and Y both buy the shares of two different companies. X gets to know that his dividend yield is 10%, and Y get to know that her dividend yield is 5%. X got pretty happy since he is getting a lot more than what he paid for each share. However, Y got a bit sad to see that her dividend yield – stock is only a meager percentage.
They both consult a financial consultant, who informs them that usually, when a company pays more dividend yield, the company’s growth potential is not that good, and vice versa. As a result, X thought upon his decision to buy the share for more dividend yield, while Y was happy knowing that she made a prudent decision.
From the above example, it’s clear that dividend yield has a lot to do with how a company is approaching its future potential. That’s why, for an investor, it’s an important measure. But to get a sound knowledge of a company, the investor also needs to look at other measures like the company’s market value, enterprise valueEnterprise ValueEnterprise value (EV) is the corporate valuation of a company, determined by using market capitalization and total debt.read more, net income for the last year, financial statements, etc.
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Dividend Yield Formula Explained in Video
Example
Good Inc. is offering a dividend of $4 per share. Binny has bought a few shares of Good Inc. at $100 per share. What would be the dividend yield of Good Inc.?
On the surface, this is a simple example. First, let us calculate the dividend yield, then interpret this.
- Dividend per share. It is $4 per share.
- Price per share i.e., $100 per share.
The Dividend yield of Good Inc. is then –
- Dividend Yield = Annual Dividend per Share / Price per Share = $4 / $100 = 4%.
An investor who doesn’t know the growth potential of Good Inc. may judge that the dividend yield is too low. However, Good Inc. may have great growth potential for which it pays fewer dividends and concentrates more on the wealth maximizationWealth MaximizationWealth maximization means the maximization of the shareholder’s wealth as a result of an increase in share price thereby increasing the market capitalization of the company. The share price increase is a direct function of how competitive the company is, its positioning, growth strategy, and how it generates profits.read more for the shareholders.
Uses
The formula used for dividend yield is the simplest, and any novice can understand how to calculate it. That’s the reason why it’s more appealing to the investor.
However, before the investors decide to look at the dividend yield, they need to look at the records of the company. This helps them know how much dividend per share the company paid in recent years, the company’s future growth potential, etc.
If investors look at all the measures along with the expected dividend yield, they get a holistic approach to the company and also understand whether to invest in that particular company or not.
Dividend Yield Calculator
You can use the following Dividend Yield Calculator
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Calculate Dividend Yield in Excel
It is very simple. One needs to provide the two inputs of dividend per shareDividend Per ShareDividends per share are calculated by dividing the total amount of dividends paid out by the company over a year by the total number of average shares held.read more and Price per Share.
You can easily calculate the ratio in the template provided.
Frequently Asked Questions (FAQs)
Any dividend yield ranging from 2-4% is considered suitable for the investor’s satisfaction. In addition, one deems it to be appropriate and positive. Any ratio of more than 4% to 6% is considered the aptest and most desirable.
Financially, getting the right advisors or skillset is of utmost importance. Prediction is vital, and someone with that knowledge and investing in the right stocks can live off their dividend’s yield to benefit their whole lives.
Best Buy Co. In., Invesco Ltd., PNC Financial Services Group Inc., and State Street Corp. are the top companies with the highest dividend yield as of 2022.
This theory claims that dividend pricing doesn’t increase the company’s stock price. Instead, it suggests that the dividend yield is not good for the company and that, generally, investors can reinvest dividends to help the company.
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This article has been a guide to what is Dividend Yield Formula. Here we explain how it works along with examples, uses & a downloadable excel template.
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