July 23, 2014

Dividend Yield Explained

Dividend Yield refers to how much a company pays out in dividends in reference to its share price. The formula to calculate a dividend yield is; yearly dividends per share / price per share = Dividend Yield.

So all in all, the dividend yield formula can tell an investor how much liquidity or cash flow they are receiving in return for every share that they have invested in. The following example further illustrates the benefit of this formula;

Assume Company A and Company B both pay yearly dividends of £2 per share. However, the price per share of Company A is £10 and the price per share of Company B is £20.  This results in a dividend yield of 20% and 10% respectively, therefore those investors who are investing solely for income would probably prefer Company A on this information alone.