DIVIDEND YIELD

Saturday Brain Storming Thought (208) 03/02/2024

DIVIDEND YIELD

Dividend Yield is a securities annual dividend payment expressed as a percentage of its current price. Dividend Yield is a ratio that shows how much income you earn in dividend payouts per year for every rupee invested in a stock, mutual fund or an exchange-traded fund

Key Takeaways of Dividend Yield

1) The Dividend Yield – displayed as a percentage – is the amount of money a company pays shareholders for owing a share of its stock dividend by its current stock price

2) Mature companies are the most likely to pay dividends

3) Companies in the utility and consumer staple industries often have relatively higher dividend yields

4) Real estate investment trusts (REITs), Master limited partnerships (MLPs), and Business development companies (BDCs) pay higher than average dividends

5) Dividends from the above companies are taxed at a higher rate

6) Its important for investors to keep in mind that higher dividend yields do not always indicate attractive investment opportunities because the dividend yield of a stock may be elevated as a result of a declining stock price

Dividend Yield calculation

Dividend Yield = (Annual Dividends per share) / (Price per share)

Dividend Rate and Dividend Yield

The dividend Rate is the amount of money that a company pays to its shareholders as dividends on a per-share basis

Dividend Yield refers to the percentage of the current stock price of a company paid out as dividends over a year

Higher & Lower Dividend Yield

1) A higher dividend Yield yield may be desirable from investors perspective

2) But, a higher dividend yield can also mean that the stock is underpriced (low denominator) or that the future dividends might not be as high as previous dividends

3) A low dividend yield might mean that the stock is overpriced (higher denominator) or that future dividends might be higher

Significance & interpretation of Dividend Yield

1) Dividend Yield is used to calculate the earnings on investment (shares) considering only the returns in the form of total dividends declared by the company during the year

2) The ratio is important for those investors who purchase shares to earn dividend income

3) Shares that earn higher dividend income can be sold in the market at higher prices, which usually results in higher profits for the investor

4) Depending solely on dividend yield figure for investing in a company may not be a wise decision

Dividend Yield Example

1) Share market price : Rs 100

2) Dividend during year : Rs 20

3) Dividend Yield : (20/100) X 100 = 20%

1) If share price Rs 80

2) Dividend during year Rs 20

3) Dividend Yield : 25%

Advantages of Dividend Yield

1) Dividend Yield is compounding

2) Investors can reinvest more shares once the company declares a dividend, thus compounding gains similar to a savings account

3) Investors use the dividend yield to understand if the company can continue paying it’s shareholders from the profits

4) this ratio is beneficial during company valuation

5) dividend yield helps to identify the difference between the current and historical level of dividends and understand if the stock is undervalued or overvalued

6) Many potential investors use this ratio as a first step to analyzing a company’s cash flow and other operations

Disadvantages of Dividend Yield

1) investors use only this factor to determine the company’s potential may be risky

2) lack of investments

3) Erroneous information

4) Denominator effect

Taxes on Dividend

1) Ordinary dividends are taxable as ordinary income

2) Qualified dividends that meet certain requirements are taxed at lower capital gain rates

Ordinary Dividends

Ordinary Dividends are payments a public company makes to owners of its common stock shares

Qualified Dividend