Explained: What a dividend yield really is and how to calculate it

Dividend Yield: Do you know what a dividend yield — often talked about and chased aggressively in Dalal Street — really means? Capital appreciation and dividends are two main sources of returns for a shareholder. Not only do dividend-paying stocks interest investors, but they also act as a barometer of a company's health and profitability.

Typically, a high dividend-paying company draws market attention, as investors want to be rewarded for their holdings regularly and generously.

So, what is a dividend exactly?   

A dividend is a type of corporate action that enables a listed company to reward its shareholders. It is an important part of the company's capital allocation strategy. It gives confidence to the shareholders that both the company's earnings as well as profitability are real, and here to stay.

What is a dividend growth rate?

A dividend growth rate or DGR indicates the percentage of the growth rate of a company over a specific period of time, say a year. 

ALSO READ: Top dividend: Six companies that have rewarded investors with 162.5-1,300% dividend recently

Dividend yield formula: How exactly is a dividend yield calculated?

A dividend yield is a ratio of dividend per share to the stock's market price. 

DIVIDEND YIELD FORMULA

Dividend yield = annual dividend per share / current market price per share

What does a dividend yield indicate?

A dividend yield — also known in market pralance as the dividend–price ratio  — determines the amount of money a company pays out as dividend each year relative to its stock price. 

DIVIDEND YIELD EXAMPLES

For instance, if a company, let's say Company A, with its shares valued at Rs 100 per share in the market is paying a dividend of Rs 4 per share, the dividend yield is 4 per cent. 

Now, let's take a real life example. 

Vedanta dividend yield 

Mining major Vedanta has paid a total interim dividend of Rs 81 per share so far in the current financial year. 

Vedanta dividend history