Dividend Yield Ratio

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#### Example

Calculate the dividend yield for Creative Intelligence Group, when:

• Annual earnings per share = \$4
• Dividend payout ratio = 50%
• Share price = \$20
• Dividend per share = earnings per share × dividend payout ratio = \$4 × 0.5 = \$2
• Dividend yield = dividend per share ÷ share price = \$2 ÷ \$20 = 0.10 = 10%

#### Overview

Dividend yield (or simply yield) is the ratio of an equity’s per-share dividend to the current price of that share. It measures the amount of money a company pays to shareholders. Ratio values enable investors to compare opportunities for potential returns from of different equities. Or, it helps investors compare the return from a specific equity to a market average.

Yield also measures the percentage of share value investors earn as dividends. In other words, investor returns. Ratio values help potential investors make decisions. For example, is it worth \$1.50 in dividends to pay \$30 for a share of stock?

#### Analysis

Dividend yield indicates the relative attractiveness of investing in a specific company’s stock. Whether investing in a specific equity is a good deal, however, depends on several subjective factors.

• Investment priorities will dictate whether higher yields indicate a better investment. Income investors are not interested in capital gains or long-term earnings growth. Generally, they prefer steady, predictable dividend-based income. These investors would use high yields as a strong positive indicator, one that measures potential return on investment. Dividend yield is meaningless to measure performance of companies that don’t give dividends or to growth-oriented investors, who care less about income.
• Risk tolerance reflects an investor’s comfort with the possibility that companies might fail to deliver expected yields. Some investors are willing to trade off a bit of return for a smaller but predictable dividend.