MSG Team's other articles

12337 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 […]

11193 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 […]

11223 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 […]

11650 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 […]

12465 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 […]

Search with tags

  • No tags available.

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.

Formula

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.

Meaning

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.

Assumptions

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.

Interpretation

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.

  • Stable Mature Companies: Dividend yield ratio is meaningful only when it is applied to stable mature companies. Companies in the field of utilities, hotels etc which have a regular and dependable cash flow are the ones in which dividend payout ratio is an important metric.

  • Often Negligible: In advanced economy companies like IT, Electronics and communication, the dividend payout ratio is negligible. Investors look at these companies as engines of growth and not as avenues of stable cash flow.

Article Written by

MSG Team

An insightful writer passionate about sharing expertise, trends, and tips, dedicated to inspiring and informing readers through engaging and thoughtful content.

Leave a reply

Your email address will not be published. Required fields are marked *

Related Articles

What are Common Size Statements ?

MSG Team

Cash Ratio – Meaning, Formula and Assumptions

MSG Team