Formula to Calculate Dividend Yield
Dividend yield is the ratio of dividend paid out by the company to the current market price of the share of the company; this is one of the most important metrics in deciding whether an investment into the share will result in the expected returns.
Every investor needs to know how much she will get back in return compared to the price she is paying for each share. The 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. formula helps the investors figure out how much return she will get back.
Let’s take a simple example to illustrate how it works.
Let’s say that X and Y both bought the shares of two different companies. X got to know that his dividend yield is 10%, and Y got to know that her dividend yield is 5%.
X got pretty happy since he is getting a lot more compared to 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. And the financial consultant told both X and Y that usually, when a company pays more dividend yield, the company’s growth potential is not that good and vice versa.
Knowing that X thought upon his decision to buy the share for more dividend yield, but Y got 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 market value of the company, enterprise valueEnterprise ValueEnterprise Value is a measure of a company's total value that spans the entire market rather than just the equity value. It includes all debt and equity-based ownership claims. This value, which is calculated as the market value of debt + market value of equity - cash and cash equivalents, is particularly relevant when valuing a takeover., net income for the last year, financial statements, etc.
Example of Dividend Yield Formula
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, we will calculate the dividend yield, and then we will discuss how we can interpret this.
- We know the dividend per share. It is $4 per share.
- We also know the 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 a great growth potential for which it pays less dividends and concentrates more on the maximization of wealthMaximization Of WealthWealth 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. for the shareholders.
The formula that is used for dividend yield is the simplest, and any novice can also understand how to calculate it. That’s why its appeal is more to the investor.
But before an investor ever decides to look at the dividend yield; she also needs to look at the past records of the company, how much dividend per share the company paid in recent years, the company’s future growth potential, etc.
If an investor looks at all the measures along with dividend yield, she will get a holistic approach to the company. And she will also understand whether to invest in that particular company or not.
Dividend Yield Calculator
You can use the following Dividend Yield Calculator
|Dividend Yield (Stock) Formula =||
Calculate Dividend Yield in Excel
It is very simple. You need 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. and Price per Share.
You can easily calculate the ratio in the template provided.
Dividend Yield Formula Video
This article has been a guide to dividend yield formula. Here we discuss how to calculate dividend yield along with practical examples, uses, and a downloadable excel template.