Dividend yield

economic-dictionary

The dividend yield is a ratio that indicates the amount of euros that is recovered from the investment with the distribution of dividends. Therefore, it is one of the sources of profitability that a shareholder has, while the other is the rise in the value of the share.

This indicator is calculated as the quotient between the dividend per share (DPA) and the market price of that share, multiplied by 100 (therefore this ratio is measured as a percentage).

Generally, companies that have a higher dividend yield ratio can provide better buying opportunities. This idea is based on the fact that investors will prefer shares that are going to pay out a “guaranteed” dividend.

Preferring a stock with a higher dividend yield implies a defensive operation for bearish situations or for investors looking for a periodic profit in the long term.

On the other hand, there are criticisms of the analysis of a company by this dividend yield method, since it is large companies that tend to distribute profits in a sustained manner over time. However, these companies generally have a lower growth rate than the market, since they would need additional resources to finance their growth at the expense of the shareholder. These companies are usually related to sectors such as electricity, energy and banking.

Also, if we analyze the dividends compared to the previous year, we are not making an accurate analysis about the expectations of the business. On the other hand, if it is about future dividends, we may find ourselves with a lack of security in their distribution, which could lead to errors in the calculation of this ratio.

Future uncertainty may add further unknowns to this calculation, as the company could reduce or cancel dividends. This, in order to provide more capital to own resources, as required by regulators today to avoid systemic financial risks.

Example of dividend yield

Suppose that a company's stock is trading at € 60. In turn, that firm has paid a dividend of 1 euro throughout the year. Then the dividend yield will be equal to (1/60) * 100, having a dividend yield of 1.6%.

Profitability ratios PER Ratio

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