Key Points
- The dividend yield is the allocation of Cash dividend to existing shareholders.
- The formula of dividend yield is Dividend per share/Market Price per Share x 100.
- Shareholders always prefer high yield dividend.
- High dividend yield may increase the price of the stock.
Definition
The dividend yield is the financial ratio that measures the allocation of cash dividends paid out to existing shareholders relative to the market value per share. This ratio is computed by dividing the dividend per share by the stock price per share, and the result must be multiplied by 100. It is expressed as a percentage. A high dividend yield company pays a substantial part of its profits to its shareholders in the form of dividends. The dividend yield of a company is always compared with the average of the industry to which the company belongs.
Purpose of Dividend yield Method
Formula of dividend yield
We already said dividend yield is computed by dividing the dividend per share by the market price per share. If we convert it as a formula, it will be:
Dividend Yield = Dividend Per Share/Market Price per Share x 100
Example: The board of XYZ Ltd. Decided to pay Tk.5 as a dividend per share. The Market price of its share is 25. What will be the dividend yield of XYZ?
Answer: Here, the dividend yield is 5/25*100 = 20%.
Dividend Yield and Shareholders reactions
Shareholders always expect a high yield. Though the payment of dividends is irrelevant, the shareholders always think the present is more certain than the future. Considering this, investors always prefer cash today rather than in the future. When dividend yield is higher than any other similar industry, positive changes in share price may happen. Investors will buy the share and the share price will increase.
Is high yield is good for the company?
In a short period high dividend yield may accelerate the share price of the company, but over time company may lose the chances of reinvestment. Whatever company pays its shareholders as a dividend, cannot reinvest and cannot make a capital gain.
Some analysts says a high dividend yield is one kind of trap for the investors because the company may manipulate the profits figure and declare a high dividend to enhance its share value.
So, it can be said, a high-yield company may not a good company always.