Why is dividend yield so important for investors? Take a look!

3M India company paid annual dividends of Rs 850 per share in 2022 and its current price is Rs 23,065 per share, so as per the formula its dividend yield would be 3.68 per cent.

What is a dividend? 

A dividend is the distribution of a company's earnings to its shareholders, which is decided by the board of directors. Dividends are typically paid out quarterly and can be received in cash or as stock reinvestment. There are 3 main types of dividends; they are block dividends, stock dividends and asset dividends. 

What is dividend yield? 

The dividend yield is a financial ratio that compares the number of cash dividends paid to shareholders to the market price per share. A company with a high dividend yield distributes a significant portion of its profits as dividends. A company's dividend yield is always compared to the average of the industry to which it belongs.  

Formula for dividend yield with example 

​Dividend Yield = Annual dividend paid per share / Current price per share 

For example, 3M India company paid annual dividends of Rs 850 per share in 2022 and its current price is Rs 23,065 per share, so as per the formula its dividend yield would be 3.68 per cent.
 

Advantages of dividend yield- 

1.) The dividend yield is used by investors to determine whether a company can continue to pay its shareholders from its profits. 

2.) This ratio assists investors in determining which dividend stocks to buy, especially for investors looking to generate income from their portfolio. They can compare stocks with high income using this ratio. 

3.) This ratio is useful when valuing a company. It aids in determining the difference between current and historical dividend levels and determining whether the stock is undervalued or overvalued. 

4.) Many prospective investors use this ratio as a starting point for investigating a company's cash flow and other operations. 

Disadvantages of dividend yield- 

1.) The fact that investors primarily consider this ratio when assessing a company's potential is one of its main drawbacks. 

2.) Although a high ratio may seem appealing, there may be additional hazards that the organization will need to consider in the years to come. As a result, it is not always appropriate to base your evaluation of a firm just on the dividend yield ratio. 

Why is dividend yield so important? 

Some investors, such as retirees, rely heavily on dividends for income. The dividend yield of their portfolio could have a significant impact on these investors. Dividend yield may be less important to other investors, such as younger investors who are more interested in growth companies that can retain earnings and use them to finance their growth.