Historical background to the Dividend Yield Ratio calculation
The Dividend Yield Ratio compares the cash return from a stock to its current stock market value.
This enables an investor to compare ratios for different companies and industries.
What is the Dividend Yield Ratio calculation?
Simply put, the Dividend Yield Ratio calculation is calculated for a quoted company as:
- Dividend Yield Ratio = (Dividend Per Share) / ( Number of Shares in issue) x 100
The Dividend Yield Ratio is expressed to the investor as a percentage.
In some countries investors may receive a tax credit for their dividend (please check with local professional tax advisors). The ratio can be adapted to take account of any tax credit (t) as:
- Dividend Yield Ratio = (Dividend Per Share/(1-t)) / ( Number of Shares in issue) x 100
Again this Dividend Yield Ratio is expressed as a percentage to the investor.
What does the Dividend Yield Ratio mean to industry and the investor?
The Dividend Yield Ratio is possibly a useful indicator to the investor, since it allows the investor to start making initial comparisons with other investment opportunities. The Dividend Yield Ratio may also be compared to the rate being offered by the government on low risk bonds (eg in the USA and UK).
What are the key problems with Dividend Yield Ratio analysis of a company (or an industry)?
One possible key problem with the Dividend Yield Ratio is that an investor’s personal situation needs to be taken into account to calculate the ratio. This simply requires a little bit more effort on the part of the investor.
It is also always worth noting that the ratio is only as good as the quality of the financial statements that it is produced from.