Rigging the LIBOR
The British banking regulator FSA has prosecuted Barclays for rigging the interest rates in the market. The regulator termed it as being equivalent to stealing money from people who invest in derivatives and other stock market instruments that are sensitive to LIBOR. Barclays, one of the largest banks in the United Kingdom had to pay […]
Dividend Discount Model: Gordon Growth Rate
In the previous article, we became aware that the value of a stock can be split into two parts. One part is the horizon period i.e. the period chosen by the analyst for which they believe they can accurately forecast the financials of the company and therefore its dividends. This part remains the same when […]
Investment Banking and Special Purpose Acquisition Companies (SPACs)
Special Purpose Acquisition Companies (SPAC) have become all the rage in the investment banking industry. They are not a new concept. They have been around for quite some time. However, they have become quite popular in the recent past. For instance, in the first half of 2020, $13.5 billion dollars were raised by Special Purpose […]
Why Timing the Market is a Bad Idea ?
Stock market investments can be akin to gambling depending on the procedure used for making these investments. If the investments are rooted in fundamental research, then they are the result of skilled judgment and therefore cannot be called gambling. On the other hand, many investors invest in the stock market as if it was a […]
How do Commercial Banks Help in Processing Payments?
Timely payments are very important to any corporation. Only if a corporation is able to keep its word and make on-time payments to vendors, does it get the best terms from these vendors. Traditionally, making timely and correct payments was a big cost for large corporations. This is because these corporations have to process thousands […]
Investors can be classified into types. The two predominant types are growth oriented investors and value oriented investors. Growth oriented investors invest in young growing companies. They expect returns in the form of capital appreciation backed by the high rate growth in the operations and profitability of the firm. On the other hand value investors invest in mature stable companies and expect returns in the form of stable cash flows paid in the form on dividends over and over again. The Dividend Yield ratio is meant for the second type of investors i.e. the value investors.
Dividend Yield = Annualized Dividend / Current Stock Price
Most companies pay dividends on a quarterly basis rather than on an annual basis. Hence for the purpose of finding out the dividend yield, analysts often annualize the dividend paid in the most recent quarter. They think it better projects the dividend paying ability of a company.
Value investors often look at the stock of a company, the way a real estate investor looks at rental properties. They expect to put money one down one time and expect to receive payments for the rest of their lives. Hence the dividend yield tells them a percentage of their original investment that they would receive each year, if they invested in the stocks right away.
The dividend yield ratio assumes that the company in question will continue making dividend payments at the same or higher rate than it is currently doing. A historical analysis of the stock market will validate this assumption. Historically companies that have been making dividend payments continue to do so. This is because a dividend cut is adversely received by the market as a very negative signal and the share price immediately plummets. It is therefore reasonable to assume that the company will continue to pay dividends until something untoward happens.
The dividend yield company must be compared to competing investment options to get a better picture of the operations of the firm. It must also be applied to the company’s own historical records to validate the fact that it has indeed been making regular dividend payments.
Your email address will not be published. Required fields are marked *
