The dividend yield is the return on a financial instrument generated by the dividend offered per unit divided by the market price of a unit of the instrument. It is expressed as a percentage.
The dividend yield is a projection of a stock investment’s return on dividends alone. The yield will increase when the price of the stock decreases, assuming that the dividend is not increased or decreased. In the opposite scenario, it will decrease when the stock price increases. Because dividend yields fluctuate in relation to stock prices, they may appear disproportionately high for stocks that are depreciating rapidly.
How to calculate the dividend yield?
Dividend Yield = (Annual Dividend ➗ Stock Price) X 100
For a listed company’s dividend paid to its shareholders, with a stock price of Rs 1,000 and the dividend being Rs 30, then the dividend yield is 3 percent.
For ETFs, the dividend yield is the dividend on an ETF unit divided by the market price of a unit.
Why is it important to calculate the dividend yield?
The dividend is a part of the income that is distributed to shareholders. An investor who is concerned about consistent payment should definitely calculate dividend yield. This will help him to not invest extra money so as to increase his equity shareholdings. To know the financial soundness of a company, it is really important to compare the dividend yield of two companies. However, it does not take into account capital gains and interest payments.
What is a good dividend yield?
There is no specific percentage laid down as a good dividend yield. Before investing in a stock, a comparison is made between the dividend yields of two companies or the dividend yield of a company and the industry. Higher the yield, the better it is, but a higher yield often comes with a higher risk. Therefore, risk factors should also be kept in mind while choosing one higher dividend yield stock over another.