Dividend yield is a financial ratio that shows how much a company pays its shareholders in dividends each year relative to its current stock price. It helps investors understand the cash income they can expect from owning a stock.
The formula is:
Dividend Yield = (Annual Dividend per Share ÷ Current Share Price) × 100
Example
- Current share price = 100
- Annual dividend = 4 per share
Dividend Yield = (4 ÷ 100) × 100% = 4%
This means you earn 4% of the stock’s current price annually in dividends, assuming the dividend remains unchanged.
Why it matters
- Higher dividend yield can mean more income for investors, but it may also indicate the stock price has fallen because the company is facing problems.
- Lower dividend yield may indicate the company is reinvesting profits to grow rather than paying them out as dividends.
Quick comparison
| Stock | Share Price | Annual Dividend | Dividend Yield |
|---|---|---|---|
| A | 50 | 1.00 | 2% |
| B | 100 | 5.00 | 5% |
Although Stock B costs more, it provides a higher dividend yield.
Remember: Dividend yield is only one factor to consider. It’s also important to evaluate the company’s earnings, dividend history, financial health, and growth prospects before investing.
