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.
HOW TO INTERPRET DIVIDEND YIELD CALCULATOR?
The interpretation of the dividend yield calculator is perhaps the most interesting part. Remember, just saying
that high dividend yield is good and low yield is bad, is not good enough. You need to get into finer aspects of
the dividend yield calculator. Here is how.
Interpreting the dividend yield calculator output
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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.
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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.
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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.
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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.
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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.
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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.
