What is Dividend Yield?

Dividend yield measures the return on investment in the form of dividends paid by a company relative to its share price. It is calculated by dividing the annual dividend paid per share by the current market price. This ratio helps investors assess how much income they can expect to receive from their investments in the form of dividends. Dividend yield is a useful metric for evaluating income-generating stocks and comparing them with other investment options. 

Calculation of Dividend Yield 

To calculate dividend yield, use the following formula: 

Dividend yield = (Annual dividend per share / Current market price per share) x 100 

Annual dividends paid per share are the total dividends a company pays to shareholders in one year divided by the number of shares. 

This formula determines the percentage return on an investment based solely on dividend income. It shows how much a shareholder earns in dividends relative to the stock’s current price, providing a clear view of the income potential from the investment. 

Example of Dividend Yield 

Suppose you are interested in investing in a company that offers an annual dividend of ₹20 per share, and the current market price is ₹400 per share. To find the dividend yield, divide the annual dividend (₹20) by the market price per share (₹400), and then multiply the result by 100 to convert it into a percentage. 
 

Calculation: 

Dividend yield = (20 / 400) x 100 

Dividend yield = 5% 

In this case, the dividend yield is 5%. This indicates that you earn 5% of the current market price of the share in the form of dividends each year. For an investment of ₹400 per share, you would receive ₹20 annually, which reflects the income generated by your investment. 

Advantages and Disadvantages of Dividend Yield 

Understanding the benefits and limitations of dividend yield can help investors make more informed decisions about their stock investments. 
 

Advantages of Dividend Yield: 

• Consistent Income: Provides a regular income stream, which can be particularly attractive for retirees or those seeking stable cash flow. 
• Income Indicator: Helps assess the income potential of an investment, allowing comparison between dividend-paying stocks and other income-generating assets. 
• Investment Appeal: A high dividend yield can indicate a financially healthy company and attract income-focused investors. 

 

Disadvantages of Dividend Yield: 

• Price Sensitivity: A high dividend yield might reflect a falling stock price, which could be due to underlying company issues. 
• Limited Growth: Companies with high dividend yields might reinvest less in growth opportunities, potentially limiting capital appreciation. 
• Market Fluctuations: Dividend yields can fluctuate with changes in stock price, which might not accurately represent the company’s overall financial health.