This article explains how you arrive at the dividend yield of a share to determine its efficiency as an investment option
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.
Equity investors look for two types of returns -
- Capital appreciation, i.e., the increase in the market value of the shares, and
- Dividend income.
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.
