Dividend Yield is a financial ratio that indicates how much a company pays out in dividends each year relative to its share price. It’s an important metric for income-focused investors, as it provides an indication of the income generated by an investment in a particular stock relative to the price of that stock.
The formula for calculating Dividend Yield is:
Dividend Yield = Annual Dividends per Share / Price per Share
For example, if a company’s annual dividend is $1.00 per share and the stock trades at $20, the Dividend Yield is 5%.
Dividend Yield = $1.00 / $20 = 0.05 or 5%
This means that investors would receive 5% on their investment in dividends.
However, it’s important to note that a higher dividend yield doesn’t always mean a better investment. It could also indicate that a company is facing problems and the stock price has dropped, increasing the yield. Therefore, while Dividend Yield can be a useful tool for comparing the income potential of different stocks, it should be used in conjunction with other financial metrics to evaluate the overall health and performance of a company.