Definition of dividend yield: Dividend yield, normally expressed as a percentage, is the ratio of how much a company pays out in dividends relative to its share price. The dividend to be considered could be the dividend the company paid in last financial year. So the formula for dividend yield looks like:
Div Yield = Annual Dividend per Share/ Current Stock Price
Dividend yield is not the only way a stock provides returns to an investor, there is also the capital gains (stock price appreciation) that one needs to look at.
Dividends get paid to the share holders whenever the company declares a dividend. Companies typically declare the dividends along with their quarterly or annual financial results. Investors looking for sustained cash flow from their equity investments prefer to invest in stocks with relatively high and stable dividend yields.
Dividend Yield explained with an example
Suppose a company 'Amigobulls Traders' pays $1 as dividend and its share price is 50$, the dividend yield will be 1/50 which is 2%. We can compare this with a company say 'XYZ Investments' that pays 2$ dividend but whose stock price is 200$, here the dividend yield is 1%.
Apart from dividend yield, there is stock price appreciation (or loss) that forms the part of returns an investor can get. In the example above, let us consider that the company Amigobulls Traders stock price moves up from 50$ to 55$ in a year whereas XYZ Investments stock price moves from $200 to $250. In the firs case the investor has got an annual return in form of capital gains as 10% whereas in the second case it is 25%.
Technology stocks are typically non-dividend paying as these companies would want to reinvest their profits into their businesses which are expected to grow faster than general market. However the investors of technology stocks may get handsomely rewarded in form of stock price appreciation.
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