Formula to Calculate Dividend Yield

Every investor needs to know how much she will get back in return compared to the price she is paying for each share. The Dividend YieldDividend YieldDividend yield ratio is the ratio of a company’s current dividend to its current share price.  It represents the potential return on investment for a given stock.read more formula helps the investors figure out how much return they will get back.

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Key Takeaways

  • The dividend yield formula is one of the essential metrics to assess the outcome of an investment. It helps determine the return investors can expect after putting their hard-earned money to use. However, other than the return, an investor also needs to look at the financial statements, goodwill of the company, growth prospects, etc. The dividend yield is a simple calculation that any newcomer to the market can also gauge using the correct tools.

Explanation

Let’s take a simple example to illustrate how it works.

Let’s say that X and Y both bought the shares of two different companies. X got to know that his dividend yield is 10%, and Y got to know that her dividend yield is 5%.X got pretty happy since he is getting a lot more than what he paid for each share. However, Y got a bit sad to see that her dividend yield – stock is only a meager percentage.

They both consult a financial consultant. And the financial consultant told both X and Y that usually, when a company pays more dividend yield, the company’s growth potential is not that good and vice versa.

Knowing that X though upon his decision to buy the share for more dividend yield, Y got happy knowing that she made a prudent decision.

From the above example, it’s clear that dividend yield has a lot to do with how a company is approaching its future potential. That’s why, for an investor, it’s an important measure. But to get a sound knowledge of a company, the investor also needs to look at other measures like the company’s market value, enterprise valueEnterprise ValueEnterprise value (EV) is the corporate valuation of a company, determined by using market capitalization and total debt.read more, net income for the last year, financial statements, etc.

Example of Dividend Yield Formula

Good Inc. is offering a dividend of $4 per share. Binny has bought a few shares of Good Inc. at $100 per share. What would be the dividend yield of Good Inc.?

On the surface, this is a simple example. First, we will calculate the dividend yield, then discuss how we can interpret this.

  • We know the dividend per share. It is $4 per share.We also know the price per share i.e., $100 per share.

The Dividend yield of Good Inc. is then –

  • Dividend Yield  = Annual Dividend per Share / Price per Share = $4 / $100 = 4%.

An investor who doesn’t know the growth potential of Good Inc. may judge that the dividend yield is too low. However, Good Inc. may have a great growth potential for which it pays fewer dividends and concentrates more on the maximization of wealthMaximization Of WealthWealth maximization means the maximization of the shareholder’s wealth as a result of an increase in share price thereby increasing the market capitalization of the company. The share price increase is a direct function of how competitive the company is, its positioning, growth strategy, and how it generates profits.read more for the shareholders.

Uses

The formula used for dividend yield is the simplest, and any novice can also understand how to calculate it. That’s why its appeal is more to the investor.

But before an investor ever decides to look at the dividend yield, she also needs to look at the records of the company, how much dividend per share the company paid in recent years, the company’s future growth potential, etc.

If an investor looks at all the measures along with dividend yield, she will get a holistic approach to the company. And she will also understand whether to invest in that particular company or not.

Dividend Yield  Calculator

You can use the following Dividend Yield Calculator

Calculate Dividend Yield in Excel

It is very simple. You need to provide the two inputs of Dividend per ShareDividend Per ShareDividends per share are calculated by dividing the total amount of dividends paid out by the company over a year by the total number of average shares held.read more and Price per Share.

You can easily calculate the ratio in the template provided.

Dividend Yield Formula Video

This article has been a guide to the dividend yield formula. Here we discuss how to calculate dividend yield and practical examples, uses, and a downloadable excel template.

Any dividend yield ranging from 2-4% is considered suitable for the investor’s satisfaction. In addition, one deems it to be appropriate and positive. Any ratio of more than 4% to 6% is considered the aptest and most desirable.

Financially, getting the right advisors or skillset is of utmost importance. Prediction is vital, and someone with that knowledge and investing in the right stocks can live off their dividend’s yield to benefit their whole lives.

Best Buy Co. In., Invesco Ltd., PNC Financial Services Group Inc., and State Street Corp. are the top companies with the highest dividend yield as of 2022.

This theory claims that dividend pricing doesn’t increase the company’s stock price. Instead, it suggests that the dividend yield is not good for the company and that, generally, investors can reinvest dividends to help the company.

  • Inventory TurnoverDividendDividendDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity.read moreCalculate Rate of ReturnCalculate Rate Of ReturnRate of Return (ROR) refers to the expected return on investment (gain or loss) & it is expressed as a percentage. You can calculate this by, ROR = {(Current Investment Value – Original Investment Value)/Original Investment Value} * 100read moreEx-Dividend Date for StocksEx-Dividend Date For StocksAn ex-dividend date is one of the four important dividend dates, usually set one business day before the record date. It is a deadline; shareholders need to buy the stocks before this date to become eligible for the upcoming dividend payout. It is also called the ex-date.read moreYield in ExcelYield In ExcelThe Yield Function in Excel is an in-built financial function to determine the yield on security or bond that pays interest periodically. It calculates bond yield by using the bond’s settlement value, maturity, rate, price, and bond redemption.read more