What is Dividend Yield? | CapWay

Posted by Shaun Morgan in InvestingMay 21, 2023(Last Updated May 21, 2023)3 min read
Key Takeaways
  • Dividend yield is a financial ratio that indicates the percentage return a company pays out to its shareholders.
  • It is calculated by dividing the annual dividend payment per share by the stock price and multiplying the result by 100 to get the percentage.
  • Dividend yield is only one factor to consider when analyzing dividends.
Are you ready to make some real money moves?

The dividend yield is a financial ratio that indicates the percentage return a company pays out to its shareholders in the form of dividends relative to the company's stock price. The dividend yield is an important metric for investors who are interested in owning stock in companies that pay dividends.

 

Calculating Dividend Yield


To calculate the dividend yield, you need to know the annual dividend payment per share and the stock price. Divide the annual dividend payment per share by the stock price, and multiply the result by 100 to get the percentage. For example, if a company pays $2 in dividends per share annually and the stock price is $50, the dividend yield is 4% ($2/$50 x 100).

 

looking for passive income

 

The dividend yield provides valuable information about a company's financial health and its willingness to pay dividends to its shareholders. The higher the dividend yield, the more income investors receive for each dollar invested in the company's stock. However, a high dividend yield may not always be a good thing if it is accompanied by a declining stock price or financial instability within the company.

 

Recommended Read: What is a Stock Split?

 

How to Use the Dividend Payout Ratio to Evaluate the Dividend Yield


The dividend payout ratio is another important metric to consider when evaluating a company's dividend policy. This ratio measures the percentage of a company's net income that is paid out to shareholders in the form of dividends. A high dividend payout ratio indicates that a company is paying out a large portion of its net income to shareholders, which may limit its ability to reinvest in the business for future growth. On the other hand, a low dividend payout ratio may indicate that a company has more cash to invest in new opportunities or strengthen its financial position.

 

passive income


 Investors should also consider the total dividends paid by a company over time when evaluating its dividend policy. A company that consistently pays dividends and increases its dividend payments over time may be a good investment opportunity for investors looking for stable income streams. However, a company that pays irregular dividends or cuts its dividend payments may indicate financial instability or poor management.

 

Recommended Read: How to Start Investing

 

Risks of Investing in Dividend Paying Companies


It is important to note that owning stock in a company that pays dividends does not guarantee a return on investment. A company's stock price can fluctuate based on a variety of factors, including changes in the overall market, the performance of the company, and investor sentiment. 

 

Additionally, a company may decide to cut or eliminate its dividend payments if it experiences financial difficulties or if management decides to reinvest the cash into the business for future growth.

 

The Money Wrap-Up


The dividend yield is an important financial ratio that investors should consider when evaluating a company's stock. However, investors should also consider other metrics, such as the dividend payout ratio and total dividends paid to get a more comprehensive view of a company's dividend policy. 

 

Ultimately, owning stock in a company that pays dividends can provide a reliable source of income for investors, but it is important to remember that investing always involves risk, and careful consideration of a company's financial health and future prospects is essential before making any investment decisions.

Was this content helpful?
Comments (0)

Sign In to leave a comment.

Download the CapWay App

Access more features to your Money Account

  • Money Goals
  • Request Money
  • Categorize Spending
  • Money Talk

The CapWay, Inc Debit Visa Card is issued by Metropolitan Commercial Bank (Member FDIC) pursuant to a license from Visa U.S.A. Inc. “Metropolitan Commercial Bank” and “Metropolitan” are registered trademarks of Metropolitan Commercial Bank ©2014.

1. For Money Account holders with a negative balance, the CapWay debit card will go into freeze until funds are deposited to bring account back to current. See terms and conditions

2. Sending or receiving money from other CapWay account holders will be instant. Transfers from other accounts could take up to 48 hours, depending on the financial institution.

3. Early access to funds requires direct deposit. Early payment is not guaranteed and is dependent on the timing of payer's submission of deposits. We generally post such deposits on the day they are received which may be up to 2 days earlier than the payer's scheduled payment date.

4. Money Goals allows account holders to save money towards financial goals created within the CapWay platform. Funds can be transferred from your Money Account or saved through the rounding up of your transactions from purchases.

5. CapWay offers financial content through Learn Money free of charge, but may include advertisements through affiliates. Phunds, CapWay's literacy program and session, is paid content or co-branded content.

© 2019-2023 CapWay Inc. All Rights Reserved.