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

Jeevan Labh

 The Life Insurance Corporation of India has announced Jeevan Labh , its limited-premium, with-profits endowment plan .   It comes with a premium paying terms of 10, 15 and 16 years for corresponding policy tenures of 16, 21, and 25 years respectively. ----------------------------------------------- Invest Rs 1,50,000 and Save Tax under Section 80C. Get Great Returns by Investing in Best Performing ELSS Mutual Funds Top 10 Tax Saving Mutual Funds to invest in India for 2016 Best 10 ELSS Mutual Funds in india for 2016 1. BNP Paribas Long Term Equity Fund 2. Axis Tax Saver Fund 3. Franklin India TaxShield 4. ICICI Prudential Long Term Equity Fund 5. IDFC Tax Advantage (ELSS) Fund 6. Birla Sun Life Tax Relief 96 7. DSP BlackRock Tax Saver Fund 8. Reliance Tax Saver (ELSS) Fund 9. Religare Tax Plan 10. Birla Sun Life Tax Plan Invest in Best Performing 2016 Tax Saver Mutual Funds Online Invest Online Download Application Forms For further information contact Prajna Capital on 94 83...

Liquidity Adjustment Facility

Liquidity adjustment facility (LAF) is a money market tool used by the central bank of a country (in India it is the Reserve Bank of India ), to infuse funds into the country's banking system when liquidity dries up. Again, in case there is excess liquidity, the central bank uses some tools to help banks manage their surplus liquidity. Usually the RBI uses the repurchase facility (called Repo ) to give short-term loans to banks to meet their temporary liquidity shortage. On the other, hand RBI uses reverse repo facility to help banks park their excess liquidity with it. Banks usually use various securities, which are approved by the RBI, as collateral when they take money from the RBI to meet their short term liquidity requirement     Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015 1. ICICI Prudential Tax Plan 2. Reliance Tax Saver (ELSS) Fund 3. HDFC TaxSaver 4. DSP BlackRock Tax Saver Fund 5. Religare Tax Plan 6. Franklin India TaxShield 7. Canara...

Tata Dynamic Bond Fund exit load

Tata Mutual Fund has revised the exit load of Tata Dynamic Bond Fund to 0.50 per cent if redeemed on or before 180 days. Currently, there is no exit load. The effective date is March 25, 2015. Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015 1. ICICI Prudential Tax Plan 2. Reliance Tax Saver (ELSS) Fund 3. HDFC TaxSaver 4. DSP BlackRock Tax Saver Fund 5. Religare Tax Plan 6. Franklin India TaxShield 7. Canara Robeco Equity Tax Saver 8. IDFC Tax Advantage (ELSS) Fund 9. Axis Tax Saver Fund 10. BNP Paribas Long Term Equity Fund You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds Invest in Tax Saver Mutual Funds Online - Invest Online Download Application Forms For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call --------------------------------------------- Leave your comment with mail ID and we will answer them OR You can write to us at PrajnaCapital [at] Gmail [dot] Com OR Leave a missed...

Home Loans that Save Time and Money

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   Home Loans that Save Time and Money  You can deposit surplus money in these special home loan schemes and reduce your loan tenure significantly in the process   IF YOU are thinking of taking a home loan and are confident of generating a surplus every month after paying the regular EMI, you can opt for loan schemes with an overdraft facility that not only cut interest payments significantly, but also reduce the loan tenure. State Bank of India, Standard Chartered Bank, HSBC and Central Bank of India offer such home loan products. Under the scheme, as a home loan borrower, you can deposit any surplus that you have into the home loan account, though you retain the option of withdrawing the sum, if required. By depositing an amount higher than your EMI , you save on interest outgo. The principal amoun...

Tata Mutual Fund changes its in Benchmark Indices for few funds

Tata Mutual Fund has approved the changes in benchmark indices of seven funds, with effect from August 01, 2011. The schemes would now be benchmarked against the following indices:   Scheme Names    Existing Benchmark    Proposed Banchmark Tata Dividend Yield Fund   BSE Sensex   S&P CNX 500 Index Tata Equity Opportunites Fund   BSE Sensex   BSE 200 Index Tata Growth Fund   BSE Sensex   CNX Midcap Index Tata Indo Global Infrastructure Fund   BSE Sensex / MSCI World   S&P CNX 500 Index / MSCI World Tata Infrastrucute Fund   BSE Sensex   S&P CNX 500 Index Tata Infrastrucute Tax Saving Fund   BSE Sensex   S&P CNX 500 Index Tata Life Sciences & Technology Fund   BSE Sensex   S&P CNX 500 Index         -----------------------------------------------------------------   Also, know how to buy mutual funds online:   Inve...
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