Dividend yield

Dividend yield is the yield a company pays out to its shareholders in the form of dividends.It is a financial ratio that shows how much a company pays out in dividends each year relative to its share price. In the absence of any capital gains, the dividend yield is the return on investment for a stock.

Dividend yield is calculated as follows:

      Dividend yield =Annual Dividends Per Share /Stock's Price Per Share

It is often expressed as a percentage. For example, if a company’s annual dividend is $1.50 and the stock trades at $25, the Dividend Yield is 6%. ($1.50 / $25 = 0.06)

Dividend yield is a way to measure how much cash flow you are getting for each dollar invested in an equity position - in other words, how much "bang for your buck" you are getting from dividends. Investors who require a minimum stream of cash flow from their investment portfolio can secure this cash flow by investing in stocks paying relatively high, stable dividend yields. Mature, well-established companies tend to have higher dividend yields, while young, growth-oriented companies tend to have lower ones, and most small growing companies don't have a dividend yield at all because they don't pay out dividends.

Dividend yield is an easy way to compare the relative attractiveness of various dividend-paying stocks. It tells an investor the yield he / she can expect by purchasing a stock. This allows a basis of comparison between other investments such as bonds, certificates of deposit, etc.

To better explain the concept, refer to this dividend yield example: If two companies both pay annual dividends of $1 per share, but ABC company's stock is trading at $20 while XYZ company's stock is trading at $40, then ABC has a dividend yield of 5% while XYZ is only yielding 2.5%. Thus, assuming all other factors are equivalent, an investor looking to supplement his or her income would likely prefer ABC's stock over that of XYZ.

Here are a few examples.

Food Retailers Dividend Yield (%)
Budgens 2.0
Dairy Farm International 1.1
Morrison 1.1
Safeway 4.4
Sainsbury 4.6
Tesco 2.9
Thorntons 5.8
Average 3.13

(Source: The Times 18 September 2002).

Breweries, Pubsand Restaurants Dividend Yield (%)
Burtonwood Brewery 3.7
Greene King 3.5
Pizza Express 3.5
Scottish and Newcastle 5.1
JD Wetherspoon 1.0
Average 3.36

(Source: The Times 18 September 2002).

At the time of writing, dividend yields seem to be rather low. The above examples are representative of the overall market. Still, why would shareholders accept such low yields? The answer is probably that shareholders are more concerned with capital gains, i.e. increases in the share price, rather than the dividend they might receive.