Dividend Yield Ratio
Dividend yield is the ratio of dividend paid per share by a company to its current share price. It is a measure of dollars of dividends received by investors per hundred dollars of their investments in the stock.
Dividends are one of the two sources for return equity shareholders receive on their investment in a company’s stock, the other being capital gains. Dividend yield measures the percentage return on a particular stock that has resulted from the company’s dividend payments.
Formula
Dividend yield is calculated by dividing dividends paid by a company during a period by the total current market value of the company’s outstanding stock.
| Dividend Yield = | Total Dividend Payments | = | Dividend Per Share |
| Total Market Capitalization | Current Share Price |
Dividend per share information can be obtained from the company’s financial statements. Alternatively, it can be calculated by dividing total dividend payments by the total number of shares.
Analysis
Dividend yield is a measure of investor return that has come from dividend payments. While dividend payout ratio compares the amount of dividend paid by a company to the company's earnings for the period, dividend yield ratio provides a comparison of amount of dividend to investment needed to purchase the shares.
A company might be paying out a relatively high, say 50%, of its earnings to investors, but if the dividend payments are too low as compared to its current share price, the investors who prefer dividends over capital gains might not be attracted by even the high payout ratio.
Dividend yield should be analyzed in the context of the company’s industry and any share buybacks. A fast growing company might not be paying any dividends resulting in a zero dividend yield, but it might be generating high capital gains for investors. On the other hand, a company in a mature industry may generate a decent dividend yield for its investors but it may not have very high future growth potential.
Example
Calculate and analyze dividend yield for Apple, Inc. (NYSE: AAPL) and ExxonMobil Corp. (NYSE) based on the information given below:
| 2011 | 2012 | 2013 | 2014 | |
| Apple (NYSE: AAPL) | ||||
| Cash dividends per share | 0.38 | 1.64 | 1.82 | |
| Year end market share price | 222 | 367 | 272 | 407 |
| ExxonMobil (NYSE:XOM) | ||||
| Cash dividends per share | 1.85 | 2.18 | 2.46 | |
| Year end market share price | 131 | 137 | 164 | 155 |
Solution
| Dividend Yield for AAPL for 2012 = | $0.38 | = 0.1% |
| $367 |
Dividend yield and capital gains for AAPL and XOM over the three years are shown below:
| 2012 | 2013 | 2014 | |
| Apple (NYSE: AAPL) | |||
| Dividend yield | 0.10% | 0.60% | 0.45% |
| Capital gain over the year | 65.32% | -25.89% | 49.63% |
| ExxonMobil (NYSE:XOM) | |||
| Dividend yield | 1.35% | 1.33% | 1.59% |
| Capital gain over the year | 4.58% | 19.71% | -5.49% |
Apple, Inc. dividend yield for 2012 is 0.1% which means that the company paid $0.1 per $100 dollars of current investment in the company’s shares. Though the dividend yield is nominal, Apple, Inc. has generated exceptional capital gains during the same period (through repurchase of shares and due to its growth potential).
ExxonMobil Corp. is in a relatively mature industry, therefore it has relatively higher dividend yield and moderate capital gains over the 3-year period.
Written by Obaidullah Jan, ACA, CFAhire me at