What is Dividend Yield Ratio?

Introduction to Dividend Yield.

Dividend Yield is used for the valuation of a company. This calculation is readily available.

Before learning dividend yield, first, we need to understand the following points.

What is a dividend?

The dividend is a reward or return given to investors from the profits of a company.

Paying of Dividend.

Paying dividend or not is the Board of Directors (BOD) decision. It’s not compulsory for a company to pay a dividend.

Dividends are proposed by BOD & approved by shareholders in the Annual general meeting (AGM).

Tax implications.

In India dividend is a tax as per the Income Tax slab rates.

Example:- If a person’s income is 20 Lakhs per annum & he receives 1 lakh of dividend income.

Then, 30000 will need to be paid as capital gain tax. (Assumed Figures).

A company announced a 200% dividend

What does it mean?

When a company issue shares they are issued at face value. Also called a nominal value.

Price of a share = 1000 & Face value per share = 10

Dividend = 10*200/100 =20.

Also Read: What is the Debt to equity ratio?

What is a Dividend Yield?

The Dividend Yield is a financial ratio that measures the annual value of a dividend received as a percentage of the current market share price of a security.

In other words, div. yield means how much of a percentage of the market share price is paid to investors in the form of a dividend.

Dividend Yield Increase.

Determining the cause of dividend yield is increase is important, the following can be two reasons.

– Fall in the share price.

When the share price of a company falls due to any reason the div. yield increases.

Example:- Co. 1 from the above example, if the share price goes down to 500 from 1000; then the div. yield be 6% (30/500*100).

– Company increase in the dividend.

Companies also increase dividend Y-o-Y basis because of sales & profit increases which can be also a reason for dividend yield expansion.

Note

Doing the homework on the cause of div. yield increases are essential.

Be aware of financial engineering

Example:- A company is heavily leveraged & still paying out heavy dividends which it can’t afford.

-Small companies v/s Big companies.

Smaller companies may not pay a dividend as they can reinvest these profits to expand their business & give a return in the form of capital appreciation.

Capital appreciation means an increased market share price.

Big companies are well established & they do not have further room to grow. Thus they are unable to reinvest profits & pay out them as dividends.

Therefore the yield depends on the business life cycle of the company.