How to Calculate Dividend Yield?

Dividend yield shows the return a company pays to shareholders as dividends relative to its share price. It is calculated by dividing the annual dividend per share by market price.
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How to Calculate Dividend Yield?
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3 mins read
27-Jan-2025

Key takeaways

  • The dividend yield is a financial ratio that compares the annual dividend per share with the current market price per share.
  • It offers valuable information about the amount of dividends a company pays per unit of the share’s market value.
  • A high dividend yield indicates that the company pays out significant dividends to its shareholders, while a low dividend yield may mean that it is reinvesting most of its profits in the business.
  • Income-focused investors may prefer companies with high dividend yields, while growth-oriented investors may prefer the opposite.

Dividend yield is calculated by dividing a stock’s annual dividend per share by its current market price, then multiplying by 100. It reflects how much dividend income an investor earns relative to the share price, showing the return generated purely from dividends. In this article, we discuss the dividend yield formula and explain how to calculate the dividend yield for different companies.

What is the dividend yield?

Dividend yield is a financial ratio that shows the dividend income you earn for every rupee invested at the current market price of a share. It is calculated using the annual dividend paid per share and the share’s prevailing market price.

The annual dividend per share formula is simple. You need to divide the total dividends paid out in a financial year by the total number of outstanding shares. Check out the dividend per share formula here:

Dividend per share = Total dividends paid during the year ÷ Total outstanding shares

Then, you can use the above value in the dividend yield formula, which is given below:

Dividend yield = Annual dividend paid per share ÷ Current market price per share

This sums up how to calculate the dividend yield. If you want more clarity about using the dividend yield formula, let us consider a hypothetical example. Say a company with a current share price of Rs. 50 has 1 lakh outstanding shares and has paid annual dividends of Rs. 10 lakhs in a year.

So, if you want to know how to calculate the dividend yield ratio, this is how it works. You need to first use the dividend per share formula to find the numerator in the dividend yield ratio.

Dividend per share:

= Total dividends paid during the year ÷ Total outstanding shares

= Rs. 10,00,000 ÷ 1,00,000 shares

= Rs. 10

Then, you can use the dividend yield formula as shown here:

Dividend yield:

= Annual dividend paid per share ÷ Current market price per share

= Rs. 10 ÷ Rs. 50

= 0.20

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Factors affecting the dividend yield

The dividend yield is affected by various factors. Some of these are evident from the dividend yield formula, while others may be more indirect. The main factors that influence this ratio include:

  1. Share price movement
     Dividend yield changes inversely with share price. If the share price falls while dividends remain constant, the yield increases, and vice versa.
  2. Dividend payout policy
    Companies with higher payout ratios usually offer higher dividend yields, while growth-focused firms may retain profits, resulting in lower yields.
  3. Company profitability
    Stable and consistent profits support regular dividend payments. A decline in earnings can lead to reduced dividends, lowering the yield.
  4. Industry characteristics
    Mature industries like utilities often have higher dividend yields compared to high-growth sectors such as technology.
  5. Interest rate environment
    Rising interest rates can reduce the attractiveness of dividend-paying stocks, affecting both share prices and yields.

Common mistakes in dividend yield calculation

Although the dividend yield formula is simple, there are some common mistakes that you should attempt to avoid, such as the following:

  • Using wrong dividend values: Some investors may mistakenly use quarterly or interim dividends in the dividend yield formula instead of the annual dividend. This may lead to inaccurate yield values. So, ensure that you verify the annual dividend value using the financial statements and use it in your calculation.
  • Including special dividends: Some companies may pay out special dividends or one-time dividends. Many experts argue that including these dividends in the dividend yield formula may lead to skewed results as such special dividends may not be sustainable in the future.
  • Using incorrect share prices: The current share price is a crucial part of dividend yield calculation. Using an outdated or incorrect share price value will lead to inaccurate ratios that could skew your investment decisions. To further avoid errors in calculation, consider using a dividend yield calculator in your analysis.

Advantages of Dividend Yield

Knowing the dividend yield can be beneficial in many ways. The top advantages of calculating and utilising this ratio include:

  1. Regular income generation
     Dividend yield highlights the cash income you earn from dividends relative to the share price, making it useful for investors seeking periodic income.
  2. Indicator of return stability
    Stocks with consistent dividend yields often belong to financially stable companies, providing a degree of predictability in returns.
  3. Helps compare investment options
    Dividend yield allows you to compare income potential across different stocks or sectors, even when their share prices vary significantly.
  4. Supports long-term investing
    Reinvested dividends can enhance long-term returns through compounding, especially during market downturns.
  5. Acts as a downside cushion
    Dividend income can partially offset price volatility, helping reduce the impact of short-term market fluctuations on overall returns.
  6. Signals shareholder-friendly policy
    A steady dividend yield often reflects a company’s commitment to rewarding shareholders and maintaining disciplined capital allocation.

Frequently asked questions

What does the dividend yield indicate about a stock?
The dividend yield tells you how much you can expect to earn as dividends per rupee of the stock’s current market price. A high yield value means that the company is returning a significant portion of its profits as dividends to shareholders. A low yield may mean that the company is investing in its growth.

How often should you recalculate the dividend yield?
Since the dividend yield formula uses the annual dividend per share, it is advisable to recalculate the ratio each year. You can also revisit a company’s dividend yield after any significant changes in its share price or when it implements a change in its dividend policy.

Can the dividend yield be negative?
No, the dividend yield ratio cannot be negative. To find this ratio, you use the annual dividend per share and the current market price per share. Since neither of these values can be negative, the overall ratio can also never be less than zero.

How does the dividend yield affect investment decisions?
Dividend yield values can give you insights into the income potential of a stock as well as its possible valuation. If you seek regular income, you may prefer a stock with a higher dividend yield. However, this is only one of the many factors to consider when you are evaluating investment options.

What is a 10% dividend yield?

A 10% dividend yield means the company pays dividends equal to 10% of its current share price annually. For example, if a share trades at Rs. 100 and pays Rs. 10 as annual dividend, the dividend yield is 10%. It reflects income return, not capital gains.

How do you calculate the dividend yield? Give an example.

Dividend yield is calculated by dividing the annual dividend per share by the current market price and multiplying by 100. For example, if a company pays Rs. 6 annually and the share price is Rs. 120, the dividend yield is (6 ÷ 120) × 100 = 5%.

How much does a 7% dividend pay?

A 7% dividend yield means you earn Rs. 7 annually for every Rs. 100 invested at the current share price. For instance, if a share is priced at Rs. 200, a 7% yield translates to an annual dividend of Rs. 14 per share, subject to company payouts.

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