Understanding Dividend Yield : A Key Metric For Smart Investments

Dividend yield is a simple yet powerful tool that help investors to determine the financial health of a company, making it an important factor to make informed investment decisions. Whether you are looking for a passive income or long-term financial growth, understanding dividend yield would help you in wealth creation.

In this article, we will explore what is dividend yield, how it is calculated, its significance, etc.

What Is The Dividend Yield ?

Dividend yield is defined as the annual amount of dividend paid by a firm in relation to its current stock price. Expressed as a percentage, it shows how much money you are getting for every rupee you invested in the company in an equity form.

How Dividend Yield Is Calculated ?

The formula to calculate dividend yield is

Dividend Yield = (Annual Dividends Per Share/Current Price Per Share) x 100

For example, if a company pays an annual dividend of Rs 5 per share and the current stock price is Rs 200, then the dividend yield is

(5/200) x 100 = 2.5 per cent

This means that for every Rs 100 invested, an investor receives a dividend of Rs 2.5. If you hold 100 shares of the company, your estimated dividend income would be Rs 250.

Some Of The Top High Dividend Yield Stocks In India

Taparia Tools

Jagran Prakashan

Coal India

Multibase India

VST Industries

Guj Pipavav Port

Balmer Lawrie

Castrol India

Ruchira Papers

Abhirami Fin.

Benefits Of Dividend Yield

• Income estimation - It provides an early insight into the income potential of your investment, which is particularly beneficial for those investors who rely on their portfolios to generate income.
• Indicator of financial health - A consistently high dividend yields would indicate that the company is performing well financially. On the other hand, low yield might indicate the company's poor financial position.
• Comparison Tool - The investors can compare the dividend yield of various companies to identify the best income-generating stocks.
• Insight into dividend policies - The high dividend yield indicates the company's commitment towards returning profits to shareholders, whereas low yield signifies reinvestment for future growth.

Drawbacks Of Dividend Yield

• Stock Fluctuations - As dividend yield is influenced by stock price, it can change daily, making it unreliable to judge a company based on past figures.
• Capital gains or losses - Investors should consider potential capital gains or losses before making investment decisions, as solely depending on dividend yields might result in missing high-growth stocks.
• Dividend cuts - Yield is based on dividend payments, but sometimes dividend payments are cut due to various financial constraints or economic downturns.

Final Verdict

While, dividend yield is considered a vital metric tool for investors, it should not be considered as a sole determinant of investment decisions. A high dividend yield is not always a positive sign, sometimes it may reflect limited growth opportunities. Conversely, a low dividend yield might suggest that companies are reinvesting their profit for future growth. So, investors should also consider other factors, such as a company's growth prospects, overall financial health and dividend payout-policies before making a final decision.