Dividend Yield
Explanation: Dividend yield is a financial ratio that shows how much a company pays out in dividends each year relative to its stock price. It is expressed as a percentage and is calculated by dividing the annual dividends per share by the current stock price. Dividend yield provides an indication of the income generated from an investment in a stock.
Example: A company pays annual dividends of $2 per share, and its stock price is $40. The dividend yield is 5% ($2 / $40 * 100), indicating that an investor would earn a 5% return from dividends alone, excluding any capital gains.
Reference Link: For more information on dividend yield, visit Investopedia’s Dividend Yield.
FAQs:
- Why is dividend yield important?
- It helps investors assess the income-generating potential of a stock, providing a basis for comparing dividend-paying stocks.
- How is dividend yield calculated?
- Dividend yield is calculated by dividing the annual dividend per share by the current stock price and multiplying by 100 to express it as a percentage.
- What is considered a good dividend yield?
- This depends on the industry and market conditions, but generally, a higher yield is attractive, provided the dividend is sustainable.
- Can dividend yield change over time?
- Yes, dividend yield can change based on fluctuations in the stock price and changes in the dividend payout.
- What are the risks of relying on dividend yield?
- High dividend yields may be unsustainable, and companies may cut dividends during financial difficulties, impacting the investment’s income potential.