What is Dividend Yield?

The dividend yield is a financial ratio that shows how much a company pays in dividends each year relative to its stock price. It is calculated by dividing the annual dividend payment by the current stock price. When the price of stock declines, dividend yield may increase. On the other hand, it will decrease when the stock price increases. Let’s find out what is dividend yield in share market, how dividend yield helps investors identify suitable investment options, its benefits, and more in this article. 

How to Calculate the Dividend Yield? 

Calculating dividend yield is a straightforward process that uses easily available information. It helps investors understand the dividend income relative to the share price. 

Step 1: Find the Annual Dividend Per Share 
This is the total dividend a company pays on one share in a year. 

Step 2: Note the Current Market Price Per Share 
This is the price at which the share is currently trading in the market. 

Step 3: Apply the Formula 
Dividend Yield = (Annual Dividends Per Share ÷ Current Price Per Share) × 100 

Example: 
Assume a company declares an annual dividend of ₹4 per share, and the current market price of one share is ₹100. 

Dividend Yield = (4 ÷ 100) × 100 = 4% 

This indicates that the dividend paid is equal to 4% of the share’s current market price. The dividend yield may change over time if the share price or the dividend amount is revised. 

Why is Dividend Yield Important? 

The following are some reasons that explain why dividend yield is important.  

• Regular Income: Most investors, particularly those seeking consistent returns over a short period, consider dividends to be important. Dividend yields offer an easy way of making funds, which is useful when an individual retires. Investors can also choose to hold onto their dividends, reinvesting them and buying more shares of the company over time.   
• Investment Comparison: Investors are always in search of investment ideas and research of dividend yields of several companies. This helps them discover better opportunities for investments. However, it is more appropriate to assess other aspects other than just dividend yield benefits.  
• Financial Indicator: A better dividend yield may also indicate that the firm is performing well. However, this is not always the case, especially if the high dividend yield causes excessive gains to be shared with shareholders rather than used for business expansion 

What Factors Affect Dividend Yield? 

Once the dividend yield meaning is understood,  understanding a few factors that could influence dividend yield is also important. The following are a few factors that usually affect dividend yield. 

Company Growth Stage 

Well-established and large companies often have stable earnings. Because of this, they may share a part of their gains as dividends. Smaller or growing companies usually focus on expansion and may reinvest earnings instead of paying dividends. 

Company Health 

A very high dividend yield may sometimes be due to a falling share price. This can indicate financial challenges within the company. In such cases, maintaining high dividend payments may become difficult over time. 

Share Price 

Share price plays a major role in dividend yield. If the share price increases and the dividend amount usually stays the same, the dividend yield goes down. Whereas if the share price falls, the yield may increase. 

Trends Across Industries 

Dividend yields vary across industries due to different business conditions. Some sectors may pay higher dividends because of steady income, while others may reduce dividends during economic slowdowns. 

Advantages and Disadvantages of Dividend Yield 

The following is the breakdown of several advantages and disadvantages of dividend yield. 

 
Conclusion 

The dividend yield is considered a useful tool in the share market. It indicates how much one can earn by holding shares of a company. Companies that offer high dividends usually attract investors who prefer regular income. Individuals can find the dividend yield ratio of companies on a stock market app. However, remember that a higher dividend yield may sometimes indicate a drop in stock price. Hence, investors need to consider the company’s current health, its future strategies, and the sustainability of its dividends. These factors, help investors make appropriate investment decisions.