Skip to main content

Personal Finance: Dividend Yield helps in evaluation of portfolio

This article explains how you arrive at the dividend yield of a share to determine its efficiency as an investment option

Equity investors look for two types of returns -

  • Capital appreciation, i.e., the increase in the market value of the shares, and
  • Dividend income.
Companies declare dividends on equity shares from the profits. The balance funds left after paying off all expenses is used to create reserves and declare dividends. Calculating dividend yield is important to calculate the true returns from an equity investment. Also, dividend yield helps analysts calculate the value of an investment, and whether it is good to invest in a particular stock.

Dividend is declared on the par value of the shares. For example, a 30 percent dividend on a Rs 10 par value equity share means a dividend of Rs 3 per share. However, in case you have paid Rs 30 to acquire the share, the dividend is still payable on Rs 10. So, the dividend yield would be 10 percent only.

Dividend yield is not equal to the amount of dividends paid by the company. It is the dividend payout with reference to the market price of a stock. It is equal to the returns from the stock as dividends. Dividends are always paid as a percentage of the face value of the share. When the dividend is received, it is computed as a percentage of the current market value of the share, and is called dividend yield.

Dividend yield is a major determining factor for stock prices. An investor has basically two objectives of investing. One is income from capital appreciation. The other is income from dividends. And it is the ability of any stock to give both these incomes, which determines its market prices on the stock market floor.

A dividend yield indicates the percentage of an investor's purchase price of a stock that is repaid to him as dividends. The absolute amount of dividend does not count for this comparison. Many investors who want a regular income - dividends - look for stocks which either maintain a steady or an upward trend of dividend declaration. They invest in scrips having a high dividend yield. A low market price combined with high dividend payout, gives high dividend yield. Dividend yield is a simple tool for any investor to evaluate his investments in scrips and choose the right portfolio, depending on his priorities.

Dividend yield also specifies how much an investor is willing to pay for the expected dividend stream to be generated by a single share. You can use the expected dividend amount over a period, or the past dividend payouts, to make the analysis.

Dividend yield varies for different investors for the same scrip. This is because the common denominator for calculating dividend yield is the market price. As the cost price for each investor will be different, depending on the time of his investment, the dividend yield will be different too. For example, assume an investor purchases a scrip for Rs 10, another purchases it for Rs 100, and the third for Rs 200. Assuming the company declares a dividend of 25 percent on the par value of Rs 10, the dividend paid will be Rs 2.50 per share. As such, the dividend yield for the first investor is 25 percent, for the second investor it is 2.50 percent, and for the third investor it is 1.25 percent. So, for the same amount of dividend, the dividend yield varies for different investors, depending on their cost of investment.

A high dividend yield does not always indicate a good investment, as it may be wiped out by the losses incurred on the falling market prices of the share. From an investment perspective, both dividend yield as well as capital appreciation are necessary to make a scrip attractive for investors. By comparing the yield of a scrip, over a period of time, you can determine whether the growth in the dividend payout has been proportionate to the increase in the market value of the share.

Popular posts from this blog

SBI Magnum Tax Gain Scheme 1993 Applcation Form

    https://sites.google.com/site/mutualfundapplications/tax-saving-mutual-funds-elss     Investment Details Basics Min Investment (Rs) 500 Subsequent Investment (Rs) 500 Min Withdrawal (Rs) -- Min Balance -- Pricing Method Forward Purchase Cut-off Time (hrs) 15 Redemption Cut-off Time (hrs) 15 Redemption Time (days) -- Lock-in 1095 days Cheque Writing -- Systematic Investment Plan SIP Yes Initial Investment (Rs) -- Additional Investment (Rs) 500 No of Cheques 12 Note Monthly investment of Rs 1000 for 6 months and quarterly investment of Rs 1500 for 4 quarters.

Impact of Demonetisation

The government's move to demonetise `500 and `1,000 currency notes will immediately impact reserve money and money supply in the system along with the balance sheet of the Reserve Bank of India, the sole authority in the country for accepting currency notes and coins as legal tender. ET explains the interplay of currency, reserve money and money supply. 1. What is currency in circulation? It is the total value of currency (coins and paper currency) that has ever been issued by the central bank minus the amount that has been withdrawn by it. Currency in circulation comprises currency notes and coins with the public and cash in hand with banks. It is a major liability component of a central bank's balance sheet. 2. What is reserve money? It is essentially the central bank's money . It is also called high-powered money , base money and central bank money . As per the definition, reserve money equals currency in circulation plus bankers' deposits

Birla Sun Life Tax Plan Online

Invest Birla Sun Life Tax Plan Online   An Open-ended Equity Linked Savings Scheme (ELSS) with the objective to achieve long-term growth of capital along with income tax relief for investment.   After a bad patch from 2008 to 2010, Birla Sun Life Tax Plan has made a big comeback in the last five years, with a particularly good run since 2014. The fund's rankings, which had slipped to two stars in 2011-12, recovered sharply to three-four stars in the last three years. The fund has delivered a particularly large outperformance over its benchmark and peers in the last couple of years. The fund's investment strategy focuses on a diversified and high-quality portfolio, with parameters such as capital ratios and balance-sheet strength used to judge quality. It uses a combination of top-down and bottom-up approaches to take sector/stock positions. The fund avoids highly leveraged plays. Staying more or less fully invested at all times, the fund parks roughly half of its portfoli

Should you Roll Over 1 year Fixed Maturity Plans?

The period between January and March typically sees an uptick in the launch of fixed maturity plans, or FMPs. Not this year. Instead, fund houses are busy rolling over or extending the tenure of their one- year FMPs launched last year to three years. Investors in one- year FMPs have a choice. Either redeem units or roll over to three years. If you exit now, your gains will be added to your income and taxed in line with your individual slab rate of 10, 20 or 30 per cent. If you stay invested for two more years, you pay 20 per cent tax with indexation benefit. Yields have softened in the past few months on expectations of a rate cut. If the central bank continues its soft monetary stance, yields are likely to fall further. In such a scenario, it makes sense for investors, particularly those in the 30 per cent tax bracket, to roll over their investments and lock in at a higher yield now. In a surprise move, the Reserve Bank of India cut repo rate by 25 basis

Max Life Monthly Income Advantage Plan

Money back policies are highly expensive, they mostly don't offer adequate insurance cover and they don't offer good returns Max Life Monthly Income Advantage Plan is a traditional money back policy. Money back policies are similar to endowment insurance plans where the policy provides for partial survival benefits during the term of the policy. These type of products are expensive, they mostly fail to offer adequate insurance cover and they don't offer good returns. What the agent has told you isn't correct. In this policy, the money back is in the form of regular income after completion of 10 years. At the end of premium paying term, you will get a guaranteed monthly income for 10 years which will be 1/12th of 10 percent of the sum assured.  So for instance, if your sum assured is R 10 Lakhs, then the guaranteed monthly income will be R 8333 (100000/12). The reversionary and terminal bonuses mentioned are not guaranteed. You will pay a very high pr
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now