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

ULIP Review: ProGrowth Super II

  If you are interested in a death cover that's just big enough, HDFC SL ProGrowth Super II is something worth a try. The beauty is it has something for everybody — you name the risk profile, the category is right up there. But do a SWOT analysis of the basket, and the gloss fades     HDFC SL ProGrowth Super II is a type-II unit-linked insurance plan ( ULIP ). Launched in September 2010, this is a small ticket-size scheme with multiple rider options and adequate death cover. It offers five investment options (funds) — one in each category of large-cap equity, mid-cap equity, balanced, debt and money market fund. COST STRUCTURE: ProGrowth Super II is reasonably priced, with the premium allocation charge lower than most others in the category. However, the scheme's mortality charge is almost 60% that of LIC mortality table for those investing early in life. This charge reduces with age. BENEFITS: Investors can choose a sum assured between 10-40 times the annualised premium...

Section 80CCD

Top SIP Funds Online   Income tax deduction under section 80CCD Under Income Tax, TaxPayers have the benefit of claiming several deductions. Out of the deduction avenues, Section 80CCD provides t axpayer deductions against investments made in specific sector s. Under Section 80CCD, an assessee is eligible to claim deductions against the contributions made to the National Pension Scheme or Atal Pension Yojana. Contributions made by an employer to National Pension Scheme are also eligible for deductions under the provisions of Section 80 CCD. In this article, we will take a look at the primary features of this section, the terms and conditions for claiming deductions, the eligibility to claim such deductions, and some of the commonly asked questions in this regard. There are two parts of Section 80CCD. Subsection 1 of this section refers to tax deductions for all assesses who are central government or state government employees, or self-employed or employed by any other employers. In...

Am you Required to E-file Tax Return?

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Am I Required to 'E-file' My Return? Yes, under the law you are required to e-file your return if your income for the year is Rs. 500,000 or more. Even if you are not required to e-file your return, it is advisable to do so for the following benefits: i) E-filing is environment friendly. ii) E-filing ensures certain validations before the return is filed. Therefore, e-returns are more accurate than the paper returns. iii) E-returns are processed faster than the paper returns. iv) E-filing can be done from the comfort of home/office and you do not have to stand in queue to e-file. v) E-returns can be accessed anytime from the tax department's e-filing portal. For further information contact Prajna Capit...

What is Electronic Clearing Service (ECS)?

  As the name suggests, it's an electronic process through which money can be transferred from one bank account to another. According to RBI, this mode is usually used for regular payments and receipts, like distribution of dividend, interest, salary, pension etc. This mode is also used for collection of bills for telephone, electricity, water, various types of taxes, payment of EMIs , investments in mutual funds , payment of insurance premium etc. There are two types of ECS , like most other banking transactions, ECS credit and ECS debit. An ECS credit is used by a bank account holder , usually a large company or an institution for services like payment of dividend, in terest, salary, pension etc. If your mutual fund pays you dividend to your bank account, of all probability it is being paid through ECS credit.ECS debit, on the other hand, is used when a company or an institution is getting money from a large number of people. For example if you are investing in a mutual fund sc...

Bharat Bond ETF

Top SIP Funds Online   The government of India has paved the way for the launch of India's first corporate bond ETF called as Bharat Bond ETF. Edelweiss Mutual Fund will be managing it. The fund is mandated to invest in AAA-rated bonds of select public sector companies (see the table 'List of constituents and their proportions in the portfolio'). The government has a threefold objective behind launching this product. One, to deepen the liquidity of the Indian debt markets and provide a gateway for easy retail participation. Two, to solve investors' dilemma of picking premium bonds. Lastly, to help the underlying government-owned companies raise funding for their operations. But does it make sense for you, the investor, to invest in it? Lets find out. What is the product? As the name suggests, it is an exchange-traded fund which will be listed on a stock exchange from where its units can be bought and sold post launch. It will have two variants - one maturing in 3 ye...
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