Dividend yield ratio communicates the value of the return that investors receive. To calculate this figure, the dividend rate is divided by a company's current share price. This figure is often an essential tool for investors who rely on dividend income, but it may also be used by value stock investors. It is important for less experienced investors to realize that this ratio may not remain constant due to market volatility.
A dividend refers to the portion of a company's profit that is paid to shareholders. This payment is made at a per share rate. Some individuals may want to determine how much money they get back compared to what they put in. To determine the value of their investments in this way, they can calculate the dividend yield ratio.
When making this calculation, a person needs two pieces of information. She needs the company's dividend rate and its current stock price. The dividend rate is placed as the numerator, the stock price is used as the denominator, and then the numbers are divided. The result is the ratio, which is expressed as a percentage.
For example, if a share of YYY Corp is $100 US dollars (USD) and the dividend is $1 USD, the dividend yield ratio is 1 percent. The more difference that there is between the stock price and the dividend rate, the lower the ratio will be. As most stock prices are volatile, the dividend yield ratio may fluctuate.
Unlike some other investment tools, there is not typically any professional advice regarding this ratio. Instead of there being a general standard, this figure is subject to personal standards. A dividend investor may have a set level and may decide that he will not purchase any stock unless the dividend yield ratio is at least 5 percent. In this case, YYY stock would not meet his needs, but for another investor a ratio of 1 percent may be suitable.
Some investors may use the ratio to make comparisons between stocks, prioritizing those with the highest ratios. Dividend investors are not the only individuals inclined to calculate this ratio. Value stock investors, for instance, may use it to determine if there is sufficient return on their investments. This ratio generally will not be used to assess growth stocks. Despite the actual motive for using the dividend yield ratio, most experienced investors will not base their decisions solely on it.