A dividend is the profit you earn from the stock you own in a company. Dividend yield is the amount of cash an investor gets from owning a specific number of shares based on the current price. It is paid annually and expressed in a ratio or percentage. Let's learn what dividend yield is and how to calculate dividend yield.
Dividend yield is the percentage of annual dividend a company pays its stockholders relative to its stock price. Shareholders use this approach to measure their return on investment.
A dividend yield of 5% means that if the market price of each share is $100, the investor will get $5 for each share annually.
A company pays a dividend yield to share the profits with the current investors.
It attracts potential investors to invest in the company.
A good dividend yield shows the financial stability of the company.
The simple dividend yield formula is the annual dividend divided by the current share price.
For example, a company decided to pay $2 annually to its investors as a dividend for every share. Each share's current market value is $20.
Dividend Yield= ($2 / $20) x 100 =10%
Suppose you own 100 shares of this company. You will get $200 (2*100) as an annual dividend from the company.
A good dividend yield ranges from 2% to 6%. However, it will vary based on the company type and its financial circumstances. Keeping the dividend yield below is considered safe.
A higher percentage of dividend yield, like above 8%, is usually unsustainable. It might be used to attract potential investors and retain current investors.
A higher dividend yield is generally considered risky. When the market conditions become worse or the company struggles to beat competitors, the company may struggle to provide the promised dividend yield consistently. It can ultimately discourage current and potential investors from investing in the company.
Share Price
The market price of shares continuously changes. If the share price increases, the dividend yield decreases. But when the share price falls, the dividend yield rises.
Dividend Policy
Not all companies have the same dividend policy. It varies based on the company's condition. For example, emerging companies will pay lower dividend yields to reinvest the profits.
Industry Standards
Most companies follow an industry standard to pay investors an annual dividend yield. For instance, the banking and utility sectors provide more dividend yields than others.
Economic Conditions
A country's economic factors, like interest rates, inflation, etc., can directly affect a company's profitability and investment. It can impact the overall dividend yields.
Regardless of the company you decide to invest in, it is crucial to consider its yearly dividend yield. It helps calculate how much earnings you will get from the company yearly. This article provided a clear overview of dividend yield.
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