Dividend yield is a financial metric that measures the annual dividend income an investor receives from a stock, expressed as a percentage of its current market price. It provides investors a clear indication of the returns gained from dividends in comparison to the share price of the investment.
Calculating dividend yield is straightforward—it takes the annual dividends paid per share and divides that number by the current price of the stock. The resulting percentage shows investors the efficiency of their investment in terms of dividend payments.
For example, if a stock trades at $100 per share and pays out an annual dividend of $5 per share, the dividend yield is calculated as:
Investors who prioritize dividend income over growth generally pay close attention to dividend yields. Typically, mature and stable companies offer higher dividend yields compared to growth-oriented companies, as they often share more of their profits directly with stockholders.
However, investors should not solely base their decisions on dividend yield, as excessive yields could also signal precisely the challenges affecting a company. It is essential to consider dividend yield alongside other financial metrics and indicators of financial health.
