Definition: Dividend yield is a financial ratio that measures cash dividends paid to each common stock shareholder as a percentage of the market value per share. In other words, it shows what percentage of the stock’s market price is being paid back in the form of a dividend that year.
What Does Dividend Yield Mean?
The dividend yield formula is calculated by dividing the annual cash dividends per share by the market value per share. Investors are interested in this equation because they want to see what the annual return will be in relation to the value of their investment. Many investors looking for regular, annual payments analyze different companies ratios to evaluate what corporation will pay the largest distribution in comparison with the smallest amount of investment. These companies are often called income stocks.
Keep in mind that this financial ratio only accounts for the cash dividends stock dividends are not taken into consideration. Some companies have a policy against issuing cash distributions to shareholders. These companies tend to be fast growing corporations that reinvest their money into growing operations instead of issuing it to shareholders. Growth companies like this tend to be in the tech industry and would rather issue stock dividends than pay out cash. Shareholders of these corporations see a return in their increased stock price over time.
Let’s look at an example.
Black Corp. has 1,000 outstanding shares at the end of the year with a current market price of $25 per share. It issued and paid a $5 dividend to each common stock shareholder during the year. Thus, Black Corp’s dividend yield is .2 ($5 payment per share / $25 FMV per share).
In other words, 20 percent of the fair market value price per share was paid out in cash to each shareholder at the end of the year. The ratio is relevant to Black’s industry. Depending on the industry, it could be considered favorable or unfavorable.