Dividend Yield Ratio
The dividend yield ratio helps to denote the percentage of dividend paid by a firm per share when compared to its market price. The formula for calculating this ratio is by dividing the annual dividend that a shareholder received on their share by the market price of that share, and it is mentioned below:
Dividend Yield Ratio = (Annual Dividend per Share / Market value of share) * 100
For example, If a company’s shares are selling at
Rs. 2000 and pay Rs. 200 as a dividend on each share to their shareholders, the dividend yield for the share would be 10% which indicates that it is a high yielding stock.
It is the potential income of an investor which can fluctuate based on the prevailing market conditions at the time of payout. It is important for the investor to be aware of existing market risks at the time of dividend payout and not just depend solely on the dividend yield. It must also be noted that any increase in the total percentage of dividend yield is not always a positive sign. It is always possible that the increase in the dividend yield could be possible due to low stock prices. Knowing the dividend yield ratio is important for investors when they want to decide whether to invest or not in a particular organisation.
Dividend Payout Ratio
The Dividend Payout Ratio shows exactly how much dividend a particular company is paying to its shareholders from its actual earned profits. It is calculated by dividing the annual dividend received per share from the actual earnings of the share.
Dividend Payout Ratio = (Annual Dividend per Share / Earning per share) * 100
For example, If the annual dividend on a company’s share is Rs. 200 and the earning per share is Rs. 500, then the dividend payout for a share would be 40% which indicates the company is reinvesting a majority of their profits for their future operations.
The dividend payout ratio can also be negative when the net income of a company becomes negative. It has been observed that the payout is lower for developing companies when compared to mature companies because they tend to reinvest the profits within the firm for better growth. The dividend payout ratio is also related to the retention ratio. A higher retention ratio automatically means a lower dividend payout ratio, but retention can also lead to higher growth and result in better dividends for the future.
Difference between Dividend Yield and Dividend Payout Ratio
Both dividend yield ratio and dividend payout ratio helps the potential investors evaluate their earnings per share and whether it is justifiable to invest in the company for the long run. These two financial ratios are an indicator of the earning potential of the company stock. However, there are many areas of difference between dividend yield and dividend payout ratio, and we will discuss them in the below table for a clearer understanding:
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The dividend yield ratio is a comparison between the dividend for a share and the market value of that share. |
The dividend payout ratio is a comparison between the dividend for a share and the earnings per share. |
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Dividend Yield Ratio = (Annual Dividend per Share / Market value of share) * 100 |
Dividend Payout Ratio = (Annual Dividend per Share / Earning per share) * 100 |
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The dividend yield ratio helps to find out the total amount that a shareholder will be earning as a dividend from a particular share. |
The dividend payout ratio helps to find out the portion of a company’s profits that it pays to its shareholders in the form of a dividend. |
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The dividend yield ratio helps to compare the dividend paid by a company to its market price. |
The dividend payout ratio helps to compare the dividend paid by a company to their overall earnings per share. |
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A higher dividend yield ratio is beneficial for the investors as it indicates that they can fetch better returns by investing in the shares in a particular company. |
A higher dividend payout ratio indicates that the company is fairly distributing their earnings to the shareholders, thus providing them with a better return on their investments. |
Conclusion
Both dividend yield and dividend payout ratio helps potential investors to decide whether or not to invest in a particular company. Although there are a number of differences between these two financial ratios, they help the investors to decide whether to put their money in the shares of a particular company.
Frequently Asked Questions
What are the different types of market value ratios?
Market value ratios help to evaluate the share price of a company. Some of the different market value ratios are as follows:
- Book value per share ratio
- Dividend yield ratio
- Earnings per share ratio
- Price-earnings ratio
- What are some of the important features of dividends?
What are some of the important features of dividends?
Some of the most important features of dividends are as follows:
- The dividend is a part of the profit that is distributed to the shareholders.
- The rate of dividend may vary depending on the type of share and the total profits of a firm.
- The dividend amount or percentage is recommended by the management of the company and sanctioned by the shareholders.
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