The dividend Yield Ratio indicates, how much dividends the investor will be getting if the investor buys the shares of the company. The dividend yield is an easy way to compare the relative attractiveness of various dividend-paying stocks. It tells an investor the return investor can expect by purchasing a stock and can thus be compared with other investments such as bonds, certificates of deposit, etc.
Dividend Yield Ratio = Dividend Per Share / Current Market Price
If the Current Market Price of the company is Rs 100 and the dividend per share is Rs 5. The dividend yield is 5%.
If the investors invest Rs 1 lakh in the company. Then Investor will be getting Rs 5000 as dividends (Rs 100000 * 0.05).
How to Use it practically
Look for high dividends yield stocks. But make sure that, company’s profit is not cyclical. Dividend yield can be high because of two reasons, first – share price drops, second – increase in dividends paid by the company.
Look for companies of the second category. Normally these are the companies that are rewarding shareholders by increasing dividend payment.