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What Is Dividend Yield Ratio – Formula & How To Calculate Dividend Per Share

Calculating dividend yield can be easy, want to know how? Here’s all you need to know about dividend yield and its meaning with examples.
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Have trouble understanding the dividend yield ratio? Here's a guide. The dividend yield ratio is one of the several factors considered before purchasing a company's stock. Companies with high dividend yields pay a large portion of their profit as dividends. They always compare their dividend yields with the average for their industry.

What is Dividend Yield Ratio?

When you calculate the dividend yield, you can determine how much cash flow you receive from each rupee invested in an equity position. Dividends are considered a return on investment if there are no capital gains.

Let's look at a dividend yield example. Suppose Suraj buys a stock currently trading at Rs 200 per share, and its annual dividend yield is Rs 20 per share. This stock has a dividend yield of 10%.

Investors can be categorised into two groups: those seeking growth and those seeking value. Growth-oriented investors seek to invest in companies that grow and expect capital gains.

On the other hand, value-oriented investors seek both capital gains and dividends over the long term. Value-oriented investors find dividend yield ratios extremely valuable. 

The following table shows the three highest dividend-paying stocks ranked on the basis of dividend yield:

Company/ StocksSub-sectorDividend Yield (%)Dividend Per Share (in rs) Cash dividends paid in FY (in crores)
Weizmann LtdTextile20.92% 1018.14
Manaksia LtdMetal diversified 18.68% 10.568.81
UFO Moviez India LtdMovies and TV serials17.79%15127.58

Source: Top 13 highest dividend-paying stocks 

What is the Formula for Dividend Yield Ratio?

A company's dividend yield measures the value of its earnings in terms of total dividends that investors receive if they invest. Percentages are commonly used to express it.

The following formula is used to calculate the dividend yield ratio:

Dividend yield ratio = Dividend per share/Market value per share

The dividend yield ratio can be calculated by taking the amount of dividend per share and dividing it by the market value per share.

How to Calculate Dividend Yield Ratio?

Suppose a company with a stock price of Rs 100 announces a dividend of Rs 10 per share. The dividend per share will be calculated as follows: Dividend per share = Total cash dividend / Outstanding common stock; which is, the dividend yield of the stock would be 10/100*100 = 10%. 

The industry and the business cycle of a company can impact the yield of a company. In a rapidly growing stage, a company might be best off not paying any dividends, as the money would be better used to invest in the business instead.

Stocks with high dividend yields are good investments in volatile times because they offer reliable payouts, making them appealing to risk-averse investors.

Companies that are old and well established are usually better positioned to pay out a higher percentage of their total investment to stockholders as dividends compared to newer companies.

How to be Aware of Too High Yields?

Smart investors may find high dividend stocks to be exceptionally rewarding. Nevertheless, investors should be cautious when chasing high dividend stocks as all may not be as it appears.

An increase in a dividend may be due to a company's stock price falling substantially, indicating financial problems that might affect the dividend payment in the future.

Additionally, rising interest rates pose a risk to dividend stocks. Dividends become less attractive in the face of a rising interest rate compared to a risk-free return from government securities.

A company's free cash flow, dividend payout ratio, dividend schedules for the past few years, and whether payments have been increasing or decreasing should all be examined.

Conclusion

Finally, dividends are essential for investors seeking passive income from their investments. Dividend yield ratios provide a measure of your investment's productivity and are also perceived as a sign of stability since only profit-making companies pay dividends. When purchasing stocks, investors ought to consider macroeconomic factors like government policies along with dividend yields and strong fundamentals.

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FAQs

  1. For which investors is the dividend yield ratio valuable?

    As value-oriented investors expect stable returns in the form of dividends and capital gains over the long term, dividend yield ratios are highly useful for these investors.
  2. Are too high yields something to be cautious about?

    Yes, investors should be careful because an increase in dividends might be due to a company's stock price falling substantially, indicating financial problems that might affect dividend payments in the future.
  3. Is it better to have a high or low dividend yield ratio?

    The higher the dividend yield, the greater the income, but higher yields are also associated with greater risk. A lower yield tends to be associated with more stable companies with a track record of steady growth and distributions, but lower yields will provide less income.

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