Recency Bias
There is a common saying in the investment markets that “In the short run, the markets are a voting machine whereas, in the long run, they are a weighing machine.” This saying is often said in order to emphasize the role of long term investment. People with short term goals often fail to perform well […]
Accounts Payable Turnover Ratio
Just like accounts receivable turnover ratio show the financing that the firm is providing to its buyers interest free, the accounts payable turnover ratio show the financing that the firm is able to receive from its vendors and suppliers free of cost. Since there are no interest charges involved and this is purely trade credit, […]
What are Fixed Income Securities?
Fixed income securities used to be a relatively obscure part of the financial markets. Up until the late 1970s, bond markets were used by wealthy individuals, corporations, and even governments to park large sums of money in low-risk-low return securities. Since these bonds were mostly issued by sovereign authorities, they were considered to be one […]
How Reverse Pitching Works? – Its Advantages & Disadvantages
Start-ups connect with large corporations in many ways. The most common way for start-ups to connect with their larger counterparts is when they try to raise funds from these companies. It is common for start-up companies to approach bigger firms in order to pitch their business. However, a lot has changed in the start-up community […]
Testing the Financial Model
The creation of a financial model is like a project which has to be undertaken by the company. This means that just like any other project, testing the functioning of the financial model should ideally be included in the project. However, in most cases, testing the financial model is generally the last phase of the […]
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.
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