Dividend
Yield
Dividend Yield can be
calculated by dividend earning per share with Market Price of share. Dividend
yield provides useful information for investment. It shows that how much annual
return for your investment. Investor may invest in share with high dividend
yield.
1. Return on investment
Dividend yield provides
information about the return on investment in terms of dividend payment
(immediate return). For some investor it may be useful information to plan
their investments.
2. Investment Comparison
Dividend Yield ration
enables to compares two investments in term of dividend payments. Ignoring
other factors i.e. (risk factors & future prospect), a rational investor
would select a high dividend yield company.
Dividend
Yield Limitations
Dividend Yield Limitations can be explained in terms of
Future growth ignored, and stability of dividend;
1. Future Growth ignored
Dividend Yield give little
consideration to the future growth of the dividend, because it is based on the
current payment of dividend, future growth aspect due to reinvestment is
ignored. Therefore Dividend yield cannot be used exclusively for investment
decisions.
2. Dividend not Stable
Dividend is not a
permanent thing, dividend is paid only in case of profitable operations, and
therefore use dividend payment for investment decision is not a suitable
option.
Dividend
Yield Formula
= Dividend
per Share
Market
Price
Dividend
Yield Example
Face Value of Share = 10
Dividend = 25%
Market Price = 130
Calculated Dividend Yield
Solution
In first place we would calculated the dividend, and
then we would calculated dividend yield.
Dividend = 25% x Face value of share
= 2.5 $ (Dividend)
Dividend
Yield= Dividend per Share
Market Price
=2.5/130
= 1.92% (Dividend Yield)
