How To Calculate Dividend Yield?

Among the many things that Indian shareholders love is liberal dividends. That explains the attraction for PSU stocks as most of these PSU stocks are extremely liberal on dividend pay-outs and carry hugely attractive dividend yields. One way to understand how much dividends companies are paying is through the dividend yield calculator.

Let us first spend a moment on the concept of dividend itself before going to dividend yield calculator. A dividend is a portion of a company's profit that is paid back to shareholders as return on investment. Normally, companies that pay regular dividends are financially stable companies with a track record and pedigree. Utility stocks and consumer discretionary stocks are classic examples of companies that traditionally pay healthy dividends.

WHAT IS DIVIDEND YIELD?

Before we get into the idea of dividend yield calculator, let us first spend a moment on Dividend yield. Now, dividend yield is different from dividend pay-out. While dividend pay-out measures the ratio of the DPS to the EPS, the dividend yield is a ratio of the DPS to the market price of the stock.
In short, dividend yield calculates the rupee amount of a company's current annual dividend per share divided by its current stock price. For example, a company with a stock price of Rs.100 and paying dividend of Rs.4 per share, has a dividend yield of 4%.
Why do dividend yields change over time. If the company is expecting growth in earnings and revenue, they may project a dividend increase. If the company is expecting slowing and/or declining earnings and revenue, they may project keeping the dividend the same. All these factors will impact the dividend yield. One way to measure the dividend yield in a jiffy is by using a dividend yield calculator.
There is an important merit in using this dividend yield calculator. Of course, it helps you figure out the dividend yield of a stock, but that is most basic utility. The dividend yield calculator also helps you to screen companies based on the dividend yield. That is where the real importance of a dividend yield calculator comes into play.

HOW TO CALCULATE DIVIDEND YIELD USING DIVIDEND YIELD CALCULATOR?

The dividend yield calculator calculates the dividend yield using the following formula:

Dividend yield = Current annual dividend per share / current stock price

Let us take an example to understand the kind of output that dividend yield calculator India can generate. For example, if you open the dividend yield calculator online and input details like Rs.2 dividends paid annually by Company X with a stock price of Rs.60 then the dividend yield calculator India will immediately work out the dividend yield as 3.33%.

In short, 2/60 = 3.33%

Since the dividend yield is based on current market price and the current market price keeps changing, the dividend yield keeps changing over time. A typical dividend yield calculator considers the rolling four quarters dividends in real time and divides the price of the stock in real time. So, you get the dividend yield updated at all times.

Interpreting the dividend yield calculator output

When you compare on dividend, you must compare apples and apples. Don't compare apples and oranges. For example, when you compare two utility stocks for example you can presume that the company with a higher dividend yield is better. However, you cannot compare a utility and an ecommerce company on this parameter.

Too much focus on dividend yield can take away your focus on growth. For example, many stocks see their dividend yield falling purely because the stock price has appreciated due to positive momentum. That does not make these stocks any less attractive. At least, not when the momentum is so favourable.

Dividend yield calculator is agnostic to how the dividend is paid. For example, the dividend yield is inflated by special dividends. This may not be sustainable and may be a one-time affair. The better thing is to take the average dividend yield of 3 or 4 years to get a more sustainable picture.

At some point dividend yields may look attractive just because the stock has corrected due to structural concerns. It is best to be cautious under these circumstances. For example, when the NBFCs corrected in 2018, their dividend yield looked attractive. But eventually, many of these NBFCs actually went out of business.

You must be familiar with something called the dividend yield trap, which is when the stock price falls faster than earnings. This is an extension of the previous argument but this is a trap that you need to beware of. Eventually, this forces the company to cut dividends and then the entire dividend story unravels.

That is why, in addition to looking at dividend yields, you must complement it with dividend pay-out ratio analysis too. The pay-out ratio is the amount of a company's net income that goes towards dividends. Ideally, you must examine a company's pay-out ratio based on the nature of the industry. However, generally markets do prefer high dividend yield stocks as it indicates the company has cash to pay out.

In reality, dividend yield is just one of the many parameters to look at in evaluating the attractiveness of the stock. Investors will have to look at other factors also to decide which company's stock is better to own. That is the bottom line and that is where as a decision support system, the dividend yield calculator comes in extremely handy.

How To Calculate Dividend Yield?

DIVIDEND YIELD CALCULATOR

WHAT IS DIVIDEND YIELD?

HOW TO CALCULATE DIVIDEND YIELD USING DIVIDEND YIELD CALCULATOR?

Dividend yield = Current annual dividend per share / current stock price

In short, 2/60 = 3.33%

HOW TO INTERPRET DIVIDEND YIELD CALCULATOR?

Interpreting the dividend yield calculator output

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