Dividend Yield Formula & Explained for Investors

What is Dividend Yield

Dividend yield is a financial ratio that expresses the percentage of dividend paid by the company compared to the current stock price. Investors use the dividend yield as a tool to determine the percentage of a company’s annual dividends payout per dollar invested. The higher dividend yields the more dividend return to the investors.

Normally, the dividend yield is analyzed by comparing with the company in the same industry, the industry average, or historical performance. A higher dividend yield indicates that the company paid more dividends per dollar invested. Conversely, a lower dividend yield means that the company paid a lower dividend.

However, we do not recommend using the dividend yield alone to evaluate a stock, because a high dividend yield isn’t always a good sign. The dividend yields can be high during the company is in a financial issue, which possibly leads to a dividend cut in the future. A second scenario is when the stock price has plummeted, a lower stock price, a lower denominator then the dividend yield is increasing.

Dividend Yield Formula

The dividend yield is calculated by dividing the dividend per share by the company’s current stock price (Price Per Share) as the following dividend yield formula:

Dividend Yield = Dividend Per Share / Price Per Share

where:

• Price per share is the current stock’s market price.
• Dividend per share = Annual dividend paid / Shareholders’ equity outstanding

For example, the Ferios company paid dividends totaling $1 per share last year and whose shares currently sell for $50. A dividend yield would be: 1 / 50 = 0.02 or 2%

A dividend yield of 0.02 or 2% means investing in the company has the potential to gain a return as the dividends for 2% of the invested money.

Frequently Asked Questions