Business, Legal & Accounting Glossary
Dividend per share divided by current market price.
The annual dividend income per share received from a company divided by its current share price.
The dividend yield is computed by dividing the annual dividend by the stock price.
Put simply – how much income are you getting out of the company for the capital you’ve got locked up in it?
Dividend yields are calculated on the net dividend.
Example: a company declares a net dividend of 2.1p per share. Its share price is 150p.
To get the dividend yield, divide the net dividend by the current share price:
2.10 /150 = 1.4%
The dividend yield is 1.4%. Note that the higher the share price, the lower the dividend yield. Using the above example, if the shares rose to 200p, the yield would fall to 1.05%
2.10/200 = 1.05%
Older, slow-growth companies usually have a relatively high dividend yield, because they have fewer investment opportunities and thus tend to return more earnings to shareholders. Newer, high-growth companies usually have a low or no dividend yield, because most or all of their earnings are reinvested in their business. For a slow-growth firm with fewer prospects of substantial price appreciation, the higher dividend yield serves to make the stock more attractive and support the stock price.
Dividend yield plays a key role in the Dogs of the Dow investment strategy, in which investors rotate into those blue-chips with the highest dividend yield. But beware: a high dividend yield is no sure measure of a safe, high-return investment. A stock may have a high dividend yield only because its price has fallen sharply on expectations that the company faces hard times and will cut its dividend.
The problem for investors is that if a company has a low dividend yield compared to other companies in its sector, it can mean two things. Either it means the company’s share price is high because the market reckons it’s got great growth prospects and doesn’t care too much about income, or it means that the company’s a busted flush and can’t afford to pay decent dividends.
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This glossary post was last updated: 26th April, 2020 | 2 Views.