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.
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.
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.