Dividend Yield: Definition, Users, Importance.

Key Points

  • 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 of dividend.
  • High dividend yield may increase the price of the stock.

Definition

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 substantial part of it’s profits to its shareholders in the form of dividend. Dividend yield of a company is always compared with the average of the industry to which the company belongs.

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 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 dividend per share. The Market price of it share is 25. What will be the dividend yield of XYZ?

Answer: Here, dividend yield is 5/25*100 = 20%.

Dividend Yield and Shareholders reactions

Shareholders always expects high yield. Though the payment of dividend is irrelevant, but the shareholders always think present is more certain than future. Considering this, investors always prefers cash today rather in future. When diviend yield is higher than any other similiar industry, a positive changes in share price may happen. Investors will buy the share and share price will increase.

Is high yield is good for the company?

In a short period high dividiend yield may accelarate the share price of the company but over the time company may loose the chances of reinvestment. Whatever company pays its shareholders as dividend, cannot reinvest and cannot make capital gain.

Some analysts says, a high dividend yield is one kind of trap for the investors because company may manipulate the profits figure and declare high dividend to enhance its share value.

So, it can be said, a high yield company may not a good company always.

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