Anchoring Bias in Behavioural Finance
The average investor may be able to keep their thinking in check and save themselves from a lot of biases. However, they still might not be aware of or be able to manage some of the more advanced biases. The anchoring bias is one such bias. It affects the thinking of even the most sophisticated […]
Sample Size Neglect
Stock investments are supposed to be made based on rational choices. In this module, we have so far learned that investors are not exactly rational and tend to become emotional a lot of times. However, it is important to note that there are some cases in which investors are pretending to be rational but are […]
Security Analysis and Portfolio Management
What is a Security ? Assets with some financial value are called securities. Characteristics of Securities Securities are tradable and represent a financial value. Securities are fungible. Classification of Securities Debt Securities: Tradable assets which have clearly defined terms and conditions are called debt securities. Financial instruments sold and purchased between parties with clearly mentioned […]
Different Types of Annuity Calculations
In the articles on present value, we learnt that the value of a dollar today is not the same as it will be 10 years from now. Then, we came across annuities which are a powerful mechanism that ensure that the nominal value of the payments remain the same throughout the years whereas its internal […]
The Bias Blind Spot
We are now aware of the fact that investment markets are not driven by mathematical decisions alone. They are heavily influenced by the emotional quotient of investors. In fact, a large number of successful investors attribute their success to their ability to manage their emotions. This is done by understanding the different types of behavioral […]
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 *
