Dividend Yield Formula

Dividend Yield Formula

Dividend Yield Formula has been given below. This formula has been explained with an example;

Dividend Yield =      Dividend During Year                                  Market Price

Dividend yield is simply calculated by dividing dividend by market price of share. Dividend Yield ratio is normally expressed in term of %.

Dividend Yield Formula Example

Dividend Paid =8

Market Price of Share = 30

Dividend Yield?

Solution

Earning Yield = 8

                     30

= 24%

 Significance of Dividend Yield

Dividend yield shows provides useful information about future cash flows or return on investment. For examples a share is trading at 100 $ and its annual dividend paid for the year is 15, then dividend yield for that share is 15% on that particular date.

Dividend yield is useful tool for the investors, who want to plan their investment on dividend or regular cash inflows. In other word this is an important ratio for those investors, who are interested in regular return/cash flows.

Dividend yield serves more like an interest for the investor, and therefore a major consideration for many investors. For this very reason dividend yield has a fundamental importance for many investors.

Limitations of Dividend Yield

Dividend is not only the sole return; there is another return i.e. (capital appreciation).  Dividend yield does not cover the share appreciation return or aspect of the investment.

Dividend yield offer no explanation for a situation, where no dividend is paid by the company. Some companies retain profit for future growth of the company, this retention is normally reflects in the share price (Share price appreciates). capital appreciation return is not reflected in the dividend yield ratio.

Another limitation of this ratio is share price, which changes every day. Technically saying every day, investor would have a new Dividend yield ratio. Average share price can solve this problem, but average calculation for daily changes in share price is itself a difficult task.

Dividend Yield Formula Practice Question

Dividend for the year = 10

Market Price of Share = 40

Dividend Yield

Solution

Earning Yield = 10

                      40

= 25%

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