What is meant by dividend yield? A practical guide to discover its meaning and use and why it is important to know how it is calculated and how it operates on the markets.
Dividend yield, what is it? Let’s look at its meaning, definition, methods of calculation and use of the formula.
Literally, dividend yield means dividend-price ratio. It is very useful for investor evaluations.
For this reason, for stock market enthusiasts it’s considered fundamental to know what dividend yield is, its meaning, its calculation methods and its formula.
The components of a stock market, in fact, are different and among these the dividend/price ratio stands out. How is it calculated and what functions does it perform?
First of all, it should be noted that the dividend yield is not the sole valuation method of the securities. However, it offers a not insignificant indication of the company in which you want to invest.
Let’s find out below what the dividend yield is and what are its definition, its meaning, the methods of calculation and uses of its formula.
Dividend yield: what is it? Definition and meaning
Defining the dividend yield is quite simple: it represents a share rate of return, ie the ratio between the dividend of a share and its market price.
Digging into the detail of the question to better understand the meaning of dividend yield, it turns out that it can be referred to above all as a measure, an immediate yield indicator that does not take into account the performance of the stock.
At the same time, the dividend/price ratio is one of the multiples necessary for the evaluation and comparison of the company; however, it does not take business risk into consideration.
Remember that the higher the dividend yield, the more that company will have the ability to remunerate the invested capital, but this relationship will still conceal problems.
A high yield may not be an entirely positive thing as every euro a company pays out in dividends is one euro less has to be invested to grow capital. While getting paid to own a stock is something very attractive, shareholders can earn even more as the value of the stock they own increases. In other words, a high dividend yield may not be entirely positive.
Dividend yield: what is it? Formula and calculation
What is the formula for calculating the dividend yield? As we have already seen in the section dedicated to the definition of the term, it represents the ratio between the dividend per share of a company and the price of a single share of the same and is expressed as a percentage. The dividend per share is obtained by dividing the profit distributed by the company by the number of shares.
To better understand how the dividend yield is calculated, let’s do a practical example. The shareholders’ meeting of company X opted for the issue of a dividend per share equal to 1 euro. The current price of the shares of that same company X is 20 euros. This means that the dividend yield of X will be equal to:
| DY = 1/20 = 0.05 = 5% |
Dividend yield: what is it? Types
Now that we have understood what the meaning, the formula and the calculation of the dividend yield is, let’s move on to examine the existing types which, just as in the case of P/E ratio are only two:
- Trailing dividend yield: Provides a percentage of the dividend paid over a specified period of time, usually one year. A trailing d.i. of 12 months, defined as TTM, includes all dividends paid in the last year for the calculation of the dividend yield. Although it may be indicative of future dividends, the measure can also be misleading as it does not take into account certain aspects such as dividend growth or cuts.
- Forward dividend yield: represents an estimate of the future yield of a share. If a company has announced dividend growth without paying anything yet, it can be used to estimate next year’s payout. Same thing if a company decides to suspend the dividend: the yield will be estimated at zero. In this case, the formula for the calculation takes the first dividend paid, annualizes it (multiplying it by 4) and then divides it all by the price of the stock.
Dividend yield: what is it? The use of the formula
What is the dividend yield for? As we observed at the beginning of our guide, it is used both to calculate the immediate return of a stock regardless of its stock market performance, and to make a comparison between companies.
It should be remembered, however, that choosing a stock based on a high dividend yield may not always represent a correct investment strategy for which more in-depth evaluations are required. Here, in short, what the dividend yield is, what its definition, its use and its formula.
Original article published on Money.it Italy 2022-02-24 16:12:00.
Original title: Dividend yield: cos’è? Formula, definizione, calcolo e utilizzo
