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%

Dividend Yield Formula 
Gordon Growth Formula 
Dividend Growth Model Formula
Dividend Payout Formula 

Ex Div Price Formula

Ex Div Price Formula

Ex div price or ex dividend share price formula has been given below. This formula has been explained with an easy example.

Ex Div Price = Share Price before Dividend- Dividend (to be paid)

Ex div or ex dividend price is simply the price of share before dividend. Ex div price concept is widely used during the calculation of cost of equity i.e. dividend is divided by the ex div share price.

Ex Div Price Formula Example

Share Price (Market value) = 12

Dividend for Year = 4

Calculate Ex Div Price?

Solution

Ex Div Price = Share Price before Dividend- Dividend (to be paid)

= 12-4

=8 (Ex Div Price)

 Cost of Equity Example

Share Price (Market value) = 16

Dividend for Year = 2

Calculate Ex Div Price and cost of equity

Solution

Ex Div Price = Share Price before Dividend- Dividend (to be paid)

= 16-2

=14 (Ex Div Price)

Cost of equity = Dividend/Ex Div Price

= 2/14

=14.2% (cost of equity)

Other Divided Formulas

Dividend Yield Formula
Gordon Growth Formula
Dividend Growth Model Formula
Dividend Payout Formula

Gordon Growth Formula

Gordon Growth Formula

Gordon Growth formula has been shown below. This formula is used to calculate or predict the expected growth of the dividend.

g=Br

g=Growth

B= Proportionate of profit retained

r= Return on equity

Application of Gordon Growth Model

Growth calculated by using Gordon growth model may be  used to calculate

1.   Cost of equity and 
2.   Market value of share 

Calculation of Gordon Growth Model

Gordon Growth model believes that dividend will grow, if some of the profit is retained and reinvested in the company operations. It means profit retained and dividend growth has direct relationship.

Dividend Growth will increase with the increase in profit retention, this concept has been explained below.Assume that cost of equity is constant , but profit retained is increasing (Changing). Then this will result increase in Dividend Growth.

20% retention x cost of equity 12% = 2.4%

30% retention x cost of equity 12% =3.6%

70% retention x cost of equity 12% = 8.4%

Cost of Equity Example

Total Number of Share   = 200,000

Value of Net Asset         = 300,000

Market Value Per Share  = 3

Dividend Paid               = 40,000

After Tax profit             = 70,000

Calculate cost of equity and Dividend Growth?

Solution

1.    Dividend Growth

Return on Equity = Profit Post Tax

                             Net Asset

Return on Equity =  70,000 .

                           300,000

Return on Equity = 23.33%

                            

Profit Retained    = 30,000 

                           70,000

=42.8% (profit retention ratio)

 Growth = 42.8% x 23.33%

= 9.98% (Growth)

2.    Cost of Equity

Cost of Equity =    [ Do ( 1+g) ] +g    

                            Share Price

= Cost of Equity =[ 40,000 ( 1+9.98%) ] + 9.98%  

                              200,000 x 3

= 17.3% (Cost of Equity)

Share Valuation Example

Current year announced dividend = 1.5

Profit retained= 30%

Cost of equity=13%

Calculate share price?

Solution

Growth = cost of equity x profit retention

= 13% x 30%

= 3.9%

Share Price = Do ( 1+g)

                      Ke-g

Do=Current Dividend

Ke =Cost of equity

g= Dividend Growth

Share Price = 1.5(1+3.9%)

                     13%-3.9%

Share Price = 1.5(1+.039)

                        9.1%

Share Price = 17.126

Dividend Yield Formula 
Gordon Growth Formula 
Dividend Growth Model Formula
Dividend Payout Formula 

Dividend Growth Model Formula

Dividend Growth Model Formula

Dividend growth model or formula is used to calculate the share value of the company. There are two famous formula used for calculating the share value. These formulas has been shown below

Dividend Growth Model- Zero Growth Formula

Share Price = Do                                Ke

AND

Dividend Growth Model- Zero Growth Formula

Share Price = Do ( 1+g)                                Ke-g

Do=Current Dividend

Ke =Cost of equity

g= Dividend Growth

 Dividend Growth Model Calculation

Dividend growth model calculation is based on the present value concept. Dividend Growth model is used to calculate the present value of future dividend. Dividend Growth model use the basic assumption of perpetuity (forever cash flows).

Significance of Dividend Growth Model

Dividend Growth model is widely used for share valuation and cost of equity calculation. Cost of equity is calculated by re arranging the above mentioned formula. Cost of equity calculation has been explained in my other article. There are two uses of dividend Growth model

1.    Cost of Equity

2.    Share Valuation

 Limitations of Dividend Growth Model Formula

Dividend growth model cannot be used in case of random growth and negative growth. Dividend growth can only be used in case of constant dividend (zero Growth) or a constant growth. Different Growths Types has been explained with examples in my other article of Historical dividend growth formula.

This model assume that dividend payment is regular activity (every year), but in fact dividend payment depends on number of factors, and company may not be in position to pay dividend every year. It is important to note that dividend payment is not obligatory requirement. The limitations of Dividend growth model has been explained below in more details;

1.    Limited Scope

Dividend Growth model cannot used for negative growth or zero growth situation. Thus dividend growth model has very limited scope.

2.    Dividend in not Obligatory

Dividend payment is not permanent or obligatory payment. Therefore using the assumption that dividend will always be paid is inappropriate. Dividend payment totally depends on the discretion on the management.

3.    No Relationship with Financial Performance

Dividend payment and financial performance has no direct relationship. Dividend payment does not reflect the good financial performance or position of the company. It is important to note that financial performance and financial position are two fundamental importance in share valuation.

4.    High Deceiving Dividend

Some companies may be paying high dividend to deceive the investors. The company management may be trying to manipulate the concept of dividend valuation model to attract new investor by paying high dividend. These tactics is widely used by the new listed companies.

5.    Accumulate Dividend

Some companies does not pay the dividend, rather invest fund for future growth of the company. Dividend growth model does not answer such situation.

Share Valuation Example (Zero) Growth)

Announced dividend (Current Year) = .9

Dividend Growth Expectation = No Growth

Cost of equity=13%

Solution

=.9/.13

=6.92

Share Valuation Example (Constant Growth)

Current year announced dividend = .9

Dividend Growth Expectation   =    5%

Cost of equity=13%

Solution

Share Price = Do ( 1+g)        

                       Ke-g

Do=Current Dividend

Ke =Cost of equity

g= Dividend Growth

Share Price = .9(1+5%)

                     13%-5%

Share Price = .9(1+05)

                       .08

Share Price = 11.8

Other name of Dividend Growth Model

Other name of dividend growth model is dividend discount model. These both terms and names can be used interchangeably.

                          

                       

Historical Dividend Growth Formula

Historical Dividend Growth Formula

Dividend Growth can be calculated with following formula. Dividend Growth formula has been explained with an example.

Dividend Growth Formula =            Dividend During the year     - 1  x 100                                                       Dividend of Last Year

Dividend Growth means that at what pace the dividend is growing. Historical dividend growth is calculated with the help of historical data. Growth is an important aspect for investment related decisions.

Historical Dividend Growth Calculation Methods

Dividend Growth is calculated by dividing the dividend for the year or current year with dividend of last or previous year. Historical Dividend growth can be classified into four classes

·         No Growth (constant Dividend)

·         Constant Growth

·         Random Growth

·         Negative Growth

It is important to mention that Dividend growth can also be calculated with Gordon Growth formula, but such growth is future growth. Gordon Growth formula is G= Br, this formula has been explained in my other article.

Significance of Historical Dividend Growth

Dividend growth is vital information for investment decision. Many people in the world plan their investment on the bases of dividend growth prospectus of the company. Divided growth information is also used to calculate share price of a company.

Dividend is more reliable gain from the share investment and investors are interested to know the growth opportunity of this gain. The growth opportunity may be estimated by historical growth and future predication. In this article we focused on the historical information or historical Growth of dividend.

Significance of Dividend Growth may be listed as below

1.    Growth helps investors to make investment decisions

2.    Growth of dividend may be used to calculate share value of company

3.    Growth is an indicator of good financial performance of company.

Zero Dividend Growth Examples

Year 1          13

Year 2          13      

Year 3          13

Solution

Year 1          13                   =0

Year 2          13 /13                  

Year 3          13/13

 Dividend Growth Formula Example (Constant Growth)

Year 1          12

Year 2          15       

Year 3          18.75

Solution

Year                              Dividend Growth

Year 1          12

Year 2          15/12                =25%

Year 3          18.75/15            =25%

Above example shows that dividend is growing at constant rate of 25%. In other word it shows that company has policy to maintain a constant dividend growth policy.

Dividend Growth Example (Random Growth)

Year 1          18

Year 2          20        

Year 3          26

Year 4          27

Solution

Year                              Dividend Growth

Year 1          18

Year 2          20/18            =11.11%

Year 3          26/20            =30%

Year 4          27/26            = 3.8%

 Constant Dividend & Constant Growth

Constant dividend and constant growth are two different concepts. Constant dividend means Zero Growth, while constant Growth means dividend is growing with a constant pace (which may be 10% or 20% etc). Difference between constant dividend and constant dividend growth has been explained below with two examples.

Constant Dividend

Year	Dividend	Dividend Growth
1	5	Zero
2	5	Zero
3	5	Zero

Constant Growth

Year	Dividend	Dividend Growth
1	5
2	7	7/5=    40%
3	9.8	9.8/7= 40%

Dividend Payout Formula

Dividend Payout Formula

Dividend payout formula has been shown below. This formula is called dividend payout ratio. This formula has been explained with an example;

Dividend Payout Ratio =            Dividend During the Year     x100                                                      EPS or Earning

Dividend payout ratio represent the proportion of profit has been distributed among equity holder. Dividend payout ratio may be calculated by simply dividing the dividend for the year by the earning for the year.

Dividend Payout Formula Example

Dividend Announced = 50 cent

Earnings per Share   = 80 Cent

Calculate Payout ratio of the company?

Solution

Dividend Payout Ratio =            Dividend during the year    

                                                     EPS or Earning

Company A = .5  x 100  

                     .8

=62.5%

It means that company has paid 62.5% of its earning to the equity holder and remaining 37.5% is retained by the company.

Significance of Dividend payout Ratio

Dividend payout ratio provides useful information for investment decision. For example a company has bright future aspects and offering high payout ratio, then investor would like to invest in such company. High payout ratio also reflects management confidence over the company future performance.

Reasons for High Payout Ratio

One of the major reasons of high payout ratio includes sufficient surplus or free cash flows. Other important reason for high payout ratio may be no immediate expansion plans or projects. One of the reasons of high payout may be boosting of the share price in the market. Reason for high payout ratio also includes maintain a high payout trend. Reasons may be listed below

1.    Available of high cash or liquidity

2.    Share price boosting

3.    Maintaining a trend of high dividend payment.

Reasons for Low Payout Ratio

One of the major reasons for low dividend payout ratio is liquidity problem (Company does not have sufficient cash for high dividend payment). The other reason of low payout ratio may be internal financing of new projects. Some companies also follow a dividend payment trend (A company may have a low payout trend).

1.    Low Liquidity (Limited Cash) with the company

2.    Internal financing for new projects(use cash for new project instead of dividend payment)

3.    Following a trend of dividend payment

Dividend Payout Consideration

1.    Liquidity Position

One of the primary considerations for the dividend payment is cash availability or liquidity position. Management would like to keep sufficient cash for the operation and remaining surplus cash can be paid as dividend to the equity holders.

2.    Internal Financing of Project

Other consideration is financing of new project , if company want to implement new project in the future and it has plans to finance such project internally, then company payout ratio would be low (in some cases company may decided to pay no dividend).

3.    Share Price

Third important dividend payout consideration is shareholder expectation or share price in the stock exchange. Market value of the firm is more relevant than book value, and market value is determined in relation to the market price, therefore company would love to maintain high market value of company.

Consideration of Dividend payout may be listed as under

1.    Cash flow position or liquidity position of the company

2.    Financing of new projects

3.    Share price in the stock exchange.