Dividend yield ratio explains what percentage of the market price of a share a firm yearly pays to be able to its stockholders as dividends. It can be calculated by dividing the annual dividend each share by industry value per discuss. The ratio is usually expressed in percentage form which is sometimes called dividend generate percentage.
Since dividend yield ratio is utilized to measure their bond between the annual quantity of dividend per share and also the current market price of a share, it is certainly caused by used by investors seeking dividend income upon continuous basis.
The following formula is used to calculated dividend yield ratio:
Example 1 – simple computation
Suppose a company declares dividend at $1.70 per share. The par value of a share of the company is $15 and the market price per share is $20. The dividend yield ratio would be computed as follows:
The dividend yield ratio is 8%. It describe an investor earns 8% on his investment (in the term of dividends) if he purchases the common stock of the business at present market price.
Generally, the famous and good established companies are in a higher position to pay a good percentage to the stockholders on their investment in the form of annual dividends as compared to another ones. Consider the following example:
Example 2 – comparison of two companies:
The following information is related to ASD company and XXC company for the year 2013:
An investor should desire the ASD company because its dividend yield ratio is significantly better than that of ZXC company. PQR is an old and well established company with a stable dividend distribution history. Also there are well chances of the appreciation in the market value of the stock of ASD. Because of these matter, ASD is a more reliable and less risky company for investment portfolio as compared to ZXC.