The dividend yield is a financial ratio that measures the amount of cash dividends distributed to common shareholders relative to the market value per share. The dividend yield is used by investors to show how their investment in stock is generating either cash flows in the form of dividends or increases in asset value by stock appreciation.
Note: Use Annual cash dividend per share
Cash Dividend per Share:
Note: Head over to the company’s website and look for it’s Distribution/Dividend History under Investors Relation.
Companies issue dividends either Annually/Bi-Annually/Quarterly. In this example, we used a company that issues Quarterly dividends.
Market Value Per Share:
- Easy to filter out stocks by their yield if the purpose is to invest for passive income
- Easily mislead investors that high yielding companies are good companies
- Can be distorted by Special One-Off Dividends
Investors use the dividend yield formula to compute the cash flow they are getting from their investment in stocks. In other words, investors want to know how much dividends they are getting for every dollar that the stock is worth.
A company with a high dividend yield pays its investors a large dividend compared to the fair market value of the stock. This means the investors are getting highly compensated for their investments compared with lower dividend yielding stocks.