The yield, also known as “dividend yield” is the ratio that measures the profit of a share, taking into account its price and the dividend profit received by the shareholders of it. When we refer to the term yield, we are talking about the yield or the profitability that the investor of a share receives.
But, in this case, we are not referring to the yield or the profitability derived from the fluctuations experienced by the price, but to the one derived from the fixed income that comes, annually and recurrently, from the dividends paid by this share.
What the yield measures is the fixed profitability that an investor receives from the dividends generated from a share. It's noteworthy that a higher dividend yield is not indicative of an attractive investment opportunity, this is because an elevated dividend yield of a stock may be as a result of a declining stock price
The yield, usually, is expressed as a percentage. This is obtained, as we will show in this guide. Proceed on!
Yield Formula: How is the yield calculated?
To calculate the yield in an investment, this formula is applicable:
Yield = (Total Gross Dividend / Share Price ) x 100
This way, if we divide the dividends obtained per share by the trading price, we will obtain the dividend yield, which we will multiply by 100 and express as a percentage. Now let's see it with an example!
The Yield of an investment
To complement the previous explanation, let's see an example of how we would calculate the yield of an investment.
Imagine a share which pays us annual dividends worth 3 dollars per share. Suppose you own100 shares, so you would get $300 dividend as a shareholder. Taking into account that the value of these shares in the market is $25, if we apply the formula above and you would get:
Yield = (3 / 25) x 100 = 12%
From this example, the yield of this investment would be 12%.
The Yield of a bet
Just like in the investment world, the term yield is commonly found in other areas where money is very present, such as betting.
In this case, yield expresses what is similar to what it does in the stock market and trading world. In this sense, it expresses a return obtained.
Thus, the yield of a bet would be calculated by multiplying the profit or loss caused by one or several bets by a hundred, then divide the result by the total amount of money invested in said bet, or bets.
This way, you would obtain the yield of the bet. Let's see with an example: Suppose you have £300 in five different bets. After seeing the result, you won £180 with two of them. The yield in this case would be as follows:
Yield = (180/300) x 100 = 60%.
In the case of this bet, the yield would be 60%. In other words, you have recovered 60% of the money wagered.
Dividend yield and Stock price
Dividend yield or dividends affect the price of underlying stock in a variety of ways. One of such is the declaration of ex-dividend date and dividend amount, that is, when dividend will be paid.
The declaration naturally encourages investors to purchase the stock because they know they will receive a dividend of the purchase before the date. This action increases the bulls of the stock and the stock price increases.
Generally, the increase in stock price increases equates increase in dividend yield as the actual price depends on the market activity of the stock not a governing entity. This can be seen as one of the financial ratios for investing.
Also, on the ex-dividend date and after, stock price may reduce as some investors just purchase the shares just before the dividend payment date to take the profit and the sell again after the date of record.
The declaration of this date have a significant and predictable effect on the price of the underlying stocks. The last day when the shares can be purchased to receive the dividend is the business day before the ex-dividend date.
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FAQs about Dividend Yield
What is a ‘good' dividend yield?
There is no one-size-fit cap to the best/ good dividend yield. Dividend shows the company's financial health with enough return to offer it investors and service it debt. However, a high dividend value can also be a sign of trouble and devaluation of the stock.
Which stock is best for dividend?
Stock best for dividends depends on the desired timeframe you look for. Dividend yield varies as prices of shares that offers the yield rise or fall and a high dividend yield may be a sign of recent downturn.
What factors affect dividend yield?
Several factors including stock market condition, company's debt profile, and performance are the major factors that affect the dividend yield of a stock.