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Dividend Yield

The dividend yield measures the income you earn from holding a stock. When a company makes a profit, it has two choices. First, it can retain the earnings for future investment. Second, it can payout those earnings to its shareholders. Most firms do a combination of both. This means they retain a portion of earnings, and payout the rest to shareholders.

The dividend yield is the percentage return from dividend payouts that a shareholder earns. For example, if a stock has a dividend yield of 5%, it means you'll receive 5 rupees in dividends for every 100 rupees worth of shares owned.

Typically, large and stable firms tend to pay higher dividends. A mature company does not require high levels of cash for future growth or expansion. Think of your typical blue chip stock. Smaller firms that require cash for expansion tend to retain most of their earnings.

Stocks that pay a high dividend yield are perceived to be safer than stocks that don't. This is true in the sense that high dividend yield stocks tend to be large and stable companies. However, it isn't the dividend that makes them safe. Rather, they pay good dividends because they are safe. If you are looking for stocks that generate regular income, then high dividend yield stocks are what you want.

Do keep in mind that dividends are only a portion of a stock's return. The remainder of the return comes from movements in the stock price, i.e. the capital gain. Generally, capital gains form a larger share of the overall return, even for high dividend yield stocks.

The Dividend Yield Formula

The dividend yield is the dividend per share divided by the market price per share. The market price per share is simply the stock price.The dividend per share comes from the most recent income statement. We multiply by 100% and report in percentage terms.

Dividend Yield = 100% * (dividend per share / market price per share)

Calculating the Dividend Yield, An Example

Suppose Bajaj Auto's current stock price is Rs 3,135. And their most recent dividend per share is Rs 55. Using our formula gives us a dividend yield of 1.75%.

Bajaj Auto dividend yield = 100% * (Rs 55 / Rs 3,135) = 1.75%

Comparing Dividend Yield with Other Indicators

How does the dividend yield compare to other indicators, such as fixed deposit yield or earnings yield? The yield on a fixed deposit is simply the return from owning a fixed deposit. It is a safe and guaranteed rate of return. If you are investing in stocks, which are risky, you should expect to earn above this rate. Now, dividend yield is not enough to determine a stock's expected rate of return. For many stocks, the dividend yield is below the fixed deposit rate. This is because a stock's expected return also consists of capital gains. And companies may also retain a significant portion of their earnings.

The earnings yield is the earnings per share divided by the market price per share. Recall that a company retains a portion of its earnings, and pays the rest as dividends. This means the earnings yield is generally higher than the dividend yield. Occasionally, it is possible for the company to payout a dividend larger than their earnings if they draw on previously retained earnings. But this is uncommon. The earnings yield is often a better measure of what a stock is worth. Most analysts tend to forecast future earnings when valuing a company. Dividends are more discretionary, since a firm can decide what portion of its earnings to payout as dividends.

Occasionally, a company may decided not to pay dividends. This could occur if they were loss making, or are planning a large expansion. Anytime a company makes a significant change in their dividends, it should be investigated.

FAQs on Dividend Yield

1. What is the dividend yield Formula?

The dividend yield is the latest annual dividend per share, declared by the company, divided by the current market price of the share.

Dividend Yield = 100% * (annual dividend per share/market price per share)

It is the amount of annual dividend paid to the investor, expressed as a percentage of the market share.

Equitymaster has a screener to help you find high dividend-yielding companies. You can start your search there.

2. Why is dividend yield important?

The dividend shows how much a company pays out in dividends each year relative to its stock price. So every Rs 100 invested in the share will generate a dividend of Rs 4.

Expressed as a percentage, this ratio evaluates your reward for every rupee you invest in the share.

3. What is the difference between earnings yield and dividend yield?

The earnings yield ratio evaluates your earnings for every rupee you invest in the share. So if a share's earnings yield is 10% it means that every Rs 100 invested in the share has generated an Earnings per share (EPS) of Rs 4.

The dividend yield evaluates your reward for every rupee you invest in the share. So if a share's dividend yield is 3% it means that every Rs 100 invested in the share has generated a dividend of Rs 3.

4. What is a good dividend yield for a stock?

Generally, this number varies with the market conditions. However, a yield of around 2-3% is ideal. Anything lower than that may not justify holding a stock for the dividend income.

You can check out the dividend yields of some of India's top stocks here:

Infosys Dividend Yield

TCS Dividend Yield

HUL Dividend Yield

Hdfc bank Dividend Yield