The dividend yield can be described as a financial ratio that indicates how much a company pays out in dividends each year relative to its share price. It’s basically a measure of how much cash flow you are getting for each rand you’ve invested in an equity position.
To understand this definition, one has to have a basic understanding of what a dividend is.
What is a dividend?
A dividend is the money that you receive for being the owner of a stock. So essentially, if you own part of a particular business, you may be eligible for a dividend pay-out.
A company’s board decides if the company has enough free cash flow to pay investors a dividend. So if your company’s board decides that there is enough money available, following payment of all debts, staff, and other working costs, you will receive a dividend pay-out.
Paying dividends is a financial tool with certain incentives for appealing to certain types of investors.
So the dividend yield tells an investor the yield he or she can expect by purchasing a stock. This yield is constantly changing, in relation to how much a stock price moves during the day.
Why the dividend yield matters:
Dividend yields are a measure of an investment’s productivity. Some view it as the “interest rate” earned on an investment.
The dividend yield can also be a sign of stability of a company and often supports a firm’s share price. Normally, only profitable companies pay out dividends.
How is the dividend yield calculated?
Dividend Yield = Annual Dividend/ Current Stock Price
There is an inverse relationship between yield and stock price.
Regardless of the number of times a dividend is paid out each year, the dividend yield is a percentage of the total annual dividend amount paid to investors in relationship to the current share price.