Algo Trading Byte

In our earlier article we discussed the first Market Value Ratio Dividend Payout Ratio. In this article we will cover another Market Value Ratio Dividend Yield.

Dividend Yield also called Current Yield measures return on investment. The higher the yield the higher is the return on investment. Generally, profitable companies payout dividend on regular basis, investors perceive such companies as less risky investment.

Current Yield or Dividend Yield = (Dividend per share / Price per share) * 100

Let us try to understand with an example, Suppose ABC corporation has paid dividend of $0.30 and has a current share price of $8.15. Then the current yield is 3.68% which means the investor gets a return of 3.68% if he has paid $8.15 for each share.

What It Tells You?

• Income Potential: It’s key for investors seeking regular cash income from their stocks. A higher yield means more income per rupee invested.
• Comparison: It helps compare the income-generating potential of different stocks or even other investments like bonds.
• Market Signal (with caution):
  • A high dividend yield might mean the stock is undervalued, or, conversely, that the company is struggling and a dividend cut is likely (a dividend trap). It’s common in mature, stable industries.
  • A low dividend yield could suggest the stock is overvalued, or that the company is a growth stock reinvesting earnings for future expansion.

Important Things to Remember

• Not the Whole Picture: Don’t rely solely on dividend yield. Always check other metrics like the Dividend Payout Ratio to see if the dividend is sustainable.
• Dividend Traps: A very high yield can be a warning sign of an unsustainable dividend, especially if the stock price has fallen due to underlying problems.
• Industry Matters: What’s considered a “good” yield varies greatly by industry. Compare within the same sector.
• Dividends Aren’t Guaranteed: Companies can change their dividend policies based on their financial health and strategy.

In short, Dividend Yield gives you a quick snapshot of a stock’s income potential, but it needs to be analyzed with other financial indicators for a complete view of an investment.

In the next article we will cover Earnings Per share.