Dividend Yield is a financial ratio that tells how much a company pays out in dividends each year in comparison to its stock price. It measures the cash dividend paid out to the shareholders relative to the market price of the share.
Understand Dividend Yield
Company has shareholders whose primary interest to earn income, either in the form of capital appreciation or dividends. Thus, to keep its shareholders happy, the company tends to pay dividends to its shareholders. This dividend is generally paid from the portion of profit which the company earns. The rest of the amount left which is not distributed goes into the retained earnings. Mature companies are the most likely to pay dividends.
Thus, it is a metric which tells about how much the shareholders are earning from their investment in a certain company. Higher the dividend yield, better it is for the shareholder.
Example
Suppose a company ABC has a stock price of Rs. 100 and announces a dividend of Rs. 5. Then dividend yield would be,
Dividend Yield = Cash Dividend per share / Market Price per share * 100
DY = (5/100)*100 = 5%