Dividend Yield

Definition

Dividend Yield is a dividend metric. It is the percentage of a company’s share price which is distributed to the shareholders as a dividend. Dividends can be viewed as a reward for the shareholder for taking the risk of investing in the business. It is not mandatory for a company to pay a dividend, the board of directors makes this decision.

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The dividend yield is calculated by dividing the annual dividend amount by the stock price. Companies pay dividends at various intervals including monthly, quarterly and yearly; the dividend formula takes a pro-rata dividend amount. Dividend yields can can change either by a change in the dividend amount or a change in the stock price of the company. A higher dividend yield might not necessarily mean a more attractive investment, as it could be due to a decreasing share price. Similarly, companies with high payout ratios – the proportion of earnings paid out to as dividend – could restrain future growth with a lack of retained earnings.

Dividend Dates

There are four dates which are important for dividend-paying entities.

  • Declaration Date: The board of directors announce the dividend that is to be paid to the companies shareholders.
  • Ex-Dividend Date: The date by which a shares dividend eligibility expires. Those investors who purchase stocks on or after this date will not be eligible for this dividend payout.
  • Record Date: The shareholders of the company, as of the ex-dividend date, are recorded for the purpose of being paid out on this dividend.
  • Payment Date: The date by which the company issues the dividend.