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Dividend Policy - Dividend Yield

Dividend Yield

A financial ratio that shows how much a company gives out in dividends each year comparative to its share price. In the lack of capital gains, the dividend yield is the return on investment for a stock.

Dividend yield is a way to criterion how much cash flow you are acquiring for each dollar invested in an equity position or in other sense, the amount much "bash for your dollar" you are acquiring from dividends. Investors who need a minimum stream of cash flow from their investment portfolio can assure this cash flow by investing in stocks paying comparatively high, stable dividend yields.

To explain the concept in better way, refer to this dividend yield instance: If two companies both pay annual dividends of $1 per share, but XYZ company's stock is dealing at $20 while XYZ company's stock is dealing at $40, then XYZ has a dividend yield of 5% while XYZ is only yielding 2.5%. Thus, assuming all other factors are equivalent, an investor looking to supplement the income would likely prefer XYZ's stock over that of XYZ.

The dividend yield or the dividend-price ratio on a company stock is the company's total annual dividend payments divided by its market capitalization, divided by the price per share. It is oftentimes conveyed as a percentage. Its multiplicative inverse is the Price or Dividend ratio.

Dividend payments on preferred shares are set out in the prospectus. The name of the preferred share will by and large admit its yield at par: for example, a 8% preferred share. On the other hand, the dividend may under some circumstances be passed or reduced. The yield is the ratio of the annual dividend to the current market price, which will alter.

Historically, a higher dividend yield has been regarded to be desirable among many investors. A high dividend yield can be regarded to be evidence that a stock is under priced or that the company has come down on hard times and succeeding dividends will not be as high as former ones. Similarly a low dividend yield can be regarded evidence that the stock is overpriced or that future dividends might be higher. Some investors may find a higher dividend yield attractive, for instance as an aid to marketing a fund to retail investors, or maybe due to they cannot get their hands on the capital, which may be tied up in a trust arrangement. In direct contrast few investors may find a higher dividend yield is not attractive, by chance due to it increases their tax bill.

Dividend yield fell out of favor somewhat during the 1990s due to of an increasing emphasis on price appreciation over dividends as the primary form of return on investments.

The significance of the dividend yield in determining investment strength is still a debated topic. The persistent historic low in the Dow Jones dividend yield during the early 21st century is regarded by some investors as indicative that the market is still overvalue.

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